Euro's path out of triangle - or triangle trap - likely to surprise most investors; don't let it hurt your portfolio

The euro moved up sharply this week, as the dollar again poked a new low especially yesterday. I've been watching this closely for signs of a trend reversal back down. A few weeks ago, it looked like it might be in a triangle that would send it back down, but it broke above including above its 200-day moving average. Triangle, or triangle trap? If it's a trap, then it will send the euro moving sharply in a direction that no one expects. But - just which direction would that be right now - does everyone expect it to fly higher? or to drop? There's a lot of bullish sentiment on the euro, so many would be surprised by a steep drop. But I don't know that many really expect it to "defy gravity" from here - so that could be the surprise. One thing seems certain - given that the euro is close to the juncture of the inflation vs. deflation paradigm, affecting other currencies, commodities and equities - being on the wrong side of the euro's movement from here could be very detrimental to many portfolios.

The euro won't officially break to the upside out of the triangle - or triangle trap - unless it exceeds 145.04. It's jumped closer to that, but has entered another area of chart resistance (which I discuss in more particular, with my charts at the bottom of this post. Given the significance of its relationship with the dollar, and implications extending to equities markets, precious metals and probably certain commodities, this seems a good time to conduct a more indepth review. And in any event, to keep a close eye on it even if not trading it, because its movement will signal the movement of other assets you probably are investing in or trading.

To add more dimension to my own chart reviews, I thought it would be interesting to adduce the views of Martin Armstrong who included a review of various currencies in a "Market Outlook" newsletter that he apparently wrote, on the topic of "One World Currency" dated May 1, 2009 (available at http://www.scribd.com/mobile/documents/15095650). His views on the euro should of course be taken in context with his comments about currencies generally. At a minimum, given the relationship with the dollar, readers should also read my post from last week, Cycles review, Part XI: Economic Confidence Model - and what about the U.S. dollar?! with review from Martin Armstrong (5/23/09) which looked at the dollar along with Armstrong's comments about it in that newsletter.

So before my thoughts on my charts (below), here's a quote from pages 1 and 22 Armstrong's May 1 newsletter along with a copy of one of his charts that he references in it (at page 22):

Until 1971, the world for the most part, relied upon gold as money. It was the neutral store of wealth that was recognized around the world. ...

The Monetary Crisis Cycle of 37.33 years has come on target - 2008 as calculated from 1971 turning point when the gold standard died. ...

There is a rising discontent politically behind closed doors where some of the noise is filtering out through the cracks. Both China and Russia are raising the question about the dollar and its global reserve currency status. ...

The EURO has fallen significantly from the 2008 high. We must face the strong possibility that since this high came on the 37 year monetary crisis cycle calculated from the 1971 collapse of the gold standard, we could still face a major serious change in trend. ...

The main channel is constructed by taking the low of 1997 and connecting that to the high of December 2004. This Breakout Line #1 forms the broadest trend for the Euro. We can see that in 2008, the top was exceeded, but not sustained. Once the Euro closed back below this line, it was all over. I have provided 4 parallels P#1a-d that form the key points within the channel. If we now come out of the bottom, it is all over. The Euro will retest par and possibly even retest the 1985 lows.

The Breakout Line #2 is constructed over the major 2000 low taking the low of early 2000 and connecting it to the immediate first high of January 2001. This provided resistance for the highs of 2004. A parallel from the Nov. '05 low, provided a nice support line for the rally and once broken, it's been a sharp drop.

The Break Line #3 takes the high of Feb. 2004 connecting it to the Nov. 2005 low. A parallel from the Dec. '04 high gives a nice target for support if Channel #1 breaks.

Breaking the 2008 low in 2009, will warn that we may see the collapse of the Euro into 2011 making this a 3 year correction. Just keep in mind that a strong dollar will confuse everyone. But the rise in the value of the dollar may be very bearish economically as it was during the 1930s.

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Update note, 6/6/09, as I see Martin Armstrong also addressed the euro in his Feb. 19, 2009 newsletter (as posted at ContraHour), stating: "In order for the Euro to show some sign of strength, it must first accomplish a monthly closing back above $1.4215. This is the minimum threshold level from a technical perspective to show same sign of survivability. The next level of key monthly closing resistance will be at $1.4315. As long as the Euro remains below this level on a monthly closing basis, then a test of the major long-term support is still possible at $1. 1680. A monthly closing below that area and it will be very unlikely that the Euro will survive in its current form."

And here are daily, weekly and monthly charts of the euro ($XEU) - the monthly having my annotations on it. (My trendlines and annotations predate any reference to Armstrong, by the way - my trendlines are based on my own view of a price channel on the monthly chart. Use of logarithmic scale influences the lines too.) The euro is running into an area of resistance that's partly based on standard chart resistance at prior swing points, and also Fibonacci levels. It just gapped up and moved above 140.75 yesterday - IF it triggers down from there (no guarantees that it does), that might be an exhaustion gap. It's also possible on an Elliott Wave basis that the gap was part of a small third wave (that's where gaps usually occur - in third waves and in C waves (which are actually considered a "type of third wave" according to the EWP book). Which could point to another Fibonacci level, at 142.60 being the 50% retrace to the peak (but I'd have thought that level already tested by the swing high around 145). And there's the Bollinger Band midline on the monthly chart just a bit higher, right about at 143 (143.18 to be exact as of yesterday).

The indicators do look strong - there might be just a small hint of negative divergence but it's slight on the daily; while the weekly chart's indicators look quite strong. Then again, the monthly chart's indicators remain well down, which can be interpreted as oversold but then again they have not totally confirmed a movement into bullish territory. The best one there is the StochRSI, which does move fast and it can also turn down again before the others move into bullish position. So I read the indicators overall as generally positive, but not in position where they would render a turn-around and movement down again as being improbable.

On the hourly charts, it looked like the euro might have been working out a trap door reversal pattern in the few days before Friday. As that broke to the upside yesterday, it became possible that the hourly chart's pattern might have been a small fourth-wave correction. So it remains possible for the euro to have completed, or be working to completion of, this rally leg. I cannot help but remember the weekly preview comments of Raymond Merriman for this weekend (posted yesterday here, Comments on financial markets for the week of June 1: Raymond Merriman (5/29/09) and available at his MMA website always included in the "other sites of interest" listed at the right side of the page here) - about being at a point now where these currency and commodity prices may continue higher into "anti-gravity" prices for a while. Indeed, that we may see "either a huge blow-off upwards in stock and/or commodity prices in the next few weeks, or a huge collapse." It's interesting that Merriman doesn't see any middle ground there - but from a chart perspective, that's how it's looking to me too.

I can state that I lean to the idea that the euro cools off and the dollar strengthens, but I definitely see the chart potential either way .... so I have to echo Merriman's comments and suggest to readers that they do what I'll be doing from here - keeping a close eye on it!