There were several bombs dropped on the markets today. First, Ben Bernanke spoke this morning with the intent of managing market expectations with regards to the thawing of the credit markets. He reminded us that though banks will most likely resume lending to each other in the near future, the damage of a frozen credit market has been done and ripple effects will be felt for months to come. This morning's September Retail Sales, the worst drop since August 2005, is a perfect example of a residual effect of a frozen credit market and resulting low employment. Then, JP Morgan's CEO said he expects the bank write downs of bad loans to continue driving the economic slump forward. And in the interest of time, I'll finish up with US Producer Prices that fell 0.4% in September. Falling oil prices, combined with poor consumer spending and retail sales, is limiting pricing power. As price levels decrease as a result of deleveraging credit markets and a shrinking money supply, beneficial disinflation turns into downright harmful deflation. Deflationary markets are usually accompanied by falling equity and commodity prices and rising bond prices, much like we've seen in recent weeks.

The fundamental reasoning of the ongoing crisis is fun to discuss, but what really gets me out of bed in the morning is when price structure, particularly when viewed through the lens of Elliott, foretells market reactions like this. I have been saying that the price structure since the 1.3270 low has not conveyed to the Elliott observer that investors have a high conviction of a quick return to normally functioning markets. More simply put, it was very difficult to count 5 waves higher following that 1.3270 low after the concerted interest rate cut. Then, after the 1.3681 high, it was almost impossible to count 5 waves higher on the way to Tuesday's 1.3768 high. If we are not counting 5 waves higher, then we do not have an uptrend. This is just basic Elliott Wave theory. So if we don't have an uptrend, we are likely still in a correction within the course of the longer-term downtrend. This is why I favored the triangle count last night.

I took a tough stop loss this morning on our short EUR/USD positions at 1.3620 before it dropped approximately 150 points. There are thin markets and I need to continue to remind myself that extra room is required on the stop losses.

I expanded the internals of the triangle count out now looking for a D-wave low tonight at 1.3445. Within that D-wave, waves a and c are equal at the .618 retracement of C-wave at 1.3445. Should 1.3450 hold, we are headed for one more bounce in e-of-4 before wave 5 lower gets underway. I will look to go long one unit of EUR/USD at 1.3440 with two different stop losses. First stop loss will be for a half unit at 1.3420 with a take profit OCO at 1.3530. The other half unit stop loss goes at 1.3395 with a take profit OCO at 1.3595.

Keep in mind we are trading the very end of a 4th wave triangle before we break lower in wave 5. With that being said, be sure to stay nimble with longs and trail stops accordingly.



Todd Gordon is a Technical Currency Strategist and Fund Trader with GAIN Capital Group.

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