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IS THERE AN INTERMARKET RELATIONSHIP WITH COMMODITIES AND FOREX
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You can bet your bottom dollar there is one such market, and that one is crude oil! There is a small correlation with the relationship with certain currencies: When crude oil prices rise in value, so does the British pound and the Canadian dollar, as both countries are producers to a degree. Even the euro benefits as the Middle East Organization of Petroleum Exporting Countries (OPEC) sell oil, receive dollars, and convert to euros. Japan is a net importer of oil; so when we see periods of high prices, the yen tends to be depressed against the dollar. Let's look at a long-term chart on crude oil to see first how Elliott wave theory can be applied to identify each wave and then the Fibonacci relationships on the corresponding correction and extensions as the rules apply that we disclosed. As we study the chart in Figure 7.11, we can easily identify wave one; the wave two correction is al most exactly equal to the Fibonacci 0.618 percent ratio. Wave four does not exceed the top of wave one. Now notice the Fibonacci 3.618 percent ex tension calculated by the amplitude of wave one that identifies a potential top in the market followed by a wedge formation.

This is the chart I presented to a group of investors on August 4 when prices were headed to rechallenge the highs. I was warning people that we were in a fifth wave price advance and that the long-term upside price objectives had been fulfilled. The market in this chart was based on the Sep tember contract; at the time, prices were at 76.16 a barrel. Here are some facts to consider: The 2.618 percent extension was projecting resistance at

75.67 per barrel. As this monthly chart shows, there was a defined wedge pattern; and as we have covered, this is consistent in developing in fifth waves. The monthly pivot R-1 for August was projected at 78.60. Less than one week after I made this presentation, the actual high was made at 78.80. Now that is one shocking coincidence.

If you look at Figure 7.12, I have a closeup of the price action on a daily chart. Several items come up here: We see that the candle pattern the prior month that made the all-time high was formed by a shooting star. Notice that in August, before the market plunged back below 69.00 per barrel, the top was formed by a dark cloud cover pattern; and as prices retreat, we see a bear flag formation, which projects a measurement to the 67.00 level.

As I was trying to finish this manuscript, the price in crude oil had declined to a low nearly touching 67.00 on September 7. Since oil has a major influence on global economies, using these techniques may help you un cover opportunities in these correlated currencies, such as the yen, the Canadian dollar, and the British pound. If crude oil prices did, in fact, con tinue to decline, it might put pressure on the U.S. dollar because the Federal Reserve might feel less inclined to continue to raise interest rates in a move to combat inflationary pressures as a result of higher energy costs. One more consideration is that if OPEC countries are selling oil, receiving dollars, and converting to euros, then, as the price of oil moves lower, this could put pressure on the euro; also, as with cheaper oil, there is less conversion action.

Let's take a look at the euro currency chart in Figure 7.13. Notice that the chart shows the various waves and the corresponding Fibonacci rela tionships. Wave two is a small correction, less than the typical 0.50 percent or 0.618 percent Fibonacci ratio; but as we examine wave four, notice that it does not penetrate below the peak of wave one. Also, see how the Fi bonacci 3.618 percent extension, as calculated by the amplitude of wave one, identifies that the top in the market followed, which was formed with a wedge pattern.

SUMMARY

Elliott wave theory works in most markets that are influenced by mass psychology. The theory combines the best of traditional charting tech niques. When you apply the Fibonacci ratios, you can better determine not only entry points but also levels at which to place your protective stop-loss orders. If you master identifying a fifth wave bullish trend, you might save a tremendous amount of money by not falling into the trap of buying a false breakout at the peak of a major upside move. The fifth wave phase nor mally is during times of extreme bullish sentiment. When the euro hit the peak near 134.68, it seemed that every hour on CNBC, analysts were calling for the euro to reach 145 and even to go as high as 150. This is a perfect example of a classic fifth wave extension. The general masses were buying at the top and expecting a market to move even higher, especially after a pro longed market advance. Keep in mind these specific technical points:

• Wave five can be determined by using extension Fibonacci 2.618 per cent and 3.618 percent extensions of the length of wave one.

• The bottom of wave two can be identified by using the Fibonacci 0.50 percent or the 0.618 percent ratio correction of the length of wave one.

• Look to buy a 0.618 percent retracement of wave three, and place your stops below the peak level of wave one.

• Wave four should not penetrate below the top of wave one; otherwise, the dynamics of the market structure have changed, and a bear trend may develop.

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