Wednesday, November 24, 2010

Prospects for the Euro - A Technical Perspective

This piece was originally penned last Friday before the Euro took its nose dive yesterday. The current trend looks bound by the lower- and mid-Bollinger band (aka 20-day MA).

There is no need to flog a dead horse as to why interest in the Euro is so high. But putting the news to one side, is there any indication - based on historic price action - as to what might lie ahead for the currency. This article will focus on EURUSD.

The story so far:

An article published by FXStreet in June 2008 looked at the long-term view of the EURUSD. The author, George Antonakos, using cycle analysis suggested the pairing would top at around 1.6700 in the latter part of 2008 as part of a 16-year cycle peak, before an 8 year decline (give or take a year) in the Euro would begin. In the end, the EURUSD topped at $1.6031 before the downward push began.

The support trendline from the 2002 reaction low was decisively sliced in the latter part of 2008 and was a point of resistance for the rally in late 2009.

The new downtrend which kicked in from the 2008 high has defined support / resistance which will provide long and short side opportunities in the years ahead, but the dominating bias will be bearish; so look for torturous rallies and rapid declines.

Zignals Chart Image

If we are staring at an 8 year bear cycle with a projected end point of 2016 (more European bailouts on the way...) what can we expect will be the bottom?

In 1984 the EURUSD bottomed at 0.6490. In 2000 the reaction low was 0.8366. So will the next low be close to parity in 2016?

If the Euro was to devalue below a 1:1 exchange to the dollar it would suggest something far more worrying for the Eurozone and an end to the multi-decade secular bull market for the Euro currency.

The current situation

Bringing the story closer to home. The pattern of trading from April through to today is similar to the action of July 08 through October action of last year, when a scrappy triangle broke to the upside before rolling over and eventually undercutting the low of the earlier triangle.

If this action was to repeat, then a break of $1.1882 in the next 6 - 12 months would be the outcome.

Zignals Chart Image

During the descent from $1.5142 to $1.1882 there was a weak rally attempt which eventually finished as a bear flag and an excellent shorting opportunity to those who spotted it.

The Dec 09 - Jan 10 bear flag topped at a former support level from October 2009. In the current scenario there is a support turned resistance at $1.3737 which is worth watching; will this play as resistance for the current bounce?

Zignals Chart Image

Whether $1.3737 plays as resistance or not, there is more dominant supply at the declining trend connecting the July 2008 top to the reaction high of November 2009. Based on its current position, resistance sits at $1.4500 but it's falling as each day passes.

If the EURUSD is in the downward phase of a 16-year cycle it's going to be hard for Eurobulls to fight the growing downtrend.

It might in the end be a case of taking the medicine and sitting it out until the market comes back to them. In the meantime, create your own personal Zignals Alerts to keep you informed of bullish or bearish EURUSD price breaks relevant to you.

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