Thursday, November 10, 2011

So the euro is really all right...?!?! Warning signs

You'd think everything in financial markets has been turning on the health (or otherwise) of the euro. While that isn't fundamentally true, it's a fact that euro weakness translates to dollar strength, which can dampen other assets in dollar-based terms. So here's how the euro looks on my daily and monthly charts. The indicators do show weaknening, and the resistance around 143/144 from which it fell back is formidable. First, the daily chart:

Notice that the euro formed an island reversal as two days' bars suspended near 142, with an air pocket of space below both before and after when looking at the ETF, called $FXE, showing on my daily chart. And island reversal is a strong reversal pattern that alone represents strong resistance. It was also at the resistance area of that prior huge "triangular" consolidation range from which it had dropped before. As it punched up there, it ran into the upper Bollinger Band while vaulting above the 200-day moving average. Now it's under that moving average and testing the lower Bollinger Band.

And now the monthly chart of $XEU:

Based on these charts, it shouldn't be expected that the euro could exceed $143/144 anytime soon, if ever again. Theoretically it could move in waves lower, and still be "just fine". That's where the fundamentals kick in, which will show whether or not the euro has staying power. But from a chart perspective, the near term looks weak. If it moves under the support level of the late 2010 lows, it could even go to 112, although there may be support around the low 130's first.

With so many eyes on it, there's the chance that the euro will buoy up for awhile. But there's also a very real possibility that when further weakness comes, it'll break support fast. That's what the indicators are showing - they are poised to roll down for a second phase of weakness that can be just as sharp as the first drop from the recent island reversal.

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