A Look at the Strengthening Euro Index

Dec 15, 2008: 11:33 AM CST

As the US Dollar has been weakening recently, foreign currencies have been strengthening, as have commodity prices.  Let’s focus on the Euro Index to see what insights we can gain from the daily and weekly chart views.

Euro Weekly:

Price has clearly broken the strong uptrend which has persisted since 2002, roughly in line with the US Stock Market bottom.  The Euro actually peaked after the US Market peak in October 2007, putting the Euro more in line roughly with commodities such as crude oil (in terms of chart structure).

Any time price retested the rising 20 week EMA was a key buy point until price broke through the average in August ’08.  At this point, the uptrend was threatened, but not broken… until price then quickly broke the rising 50 week EMA and formed a counter-rally into the confluence zone ($148) where the moving averages crossed, confirming a new downtrend in price (red arrow).

Ultimately price plunged from this point, falling sharply as the US Dollar Index rose just as sharply.  Not even the 200 week SMA was support for the Euro as the index made brief new lows not seen since 2006.

What’s happening now is a different story, and for that, let’s turn to the Daily chart.

Euro Daily:

Price formed a key sell signal in September as price came off a momentum divergence (not labeled) and found key resistance at the falling 50 day EMA, plunging price to new 2008 lows into October.

November saw an interesting technical juncture, as the momentum oscillator revealed bullish strength yet price was unable to overcome the resistance given by the 20 day EMA and almost formed some sort of a bearish descending triangle… that resolved to the upside, soon breaking both the 20 and 50 day EMAs.

I wanted to use this as an example to caution against reading too much bias into triangle patterns.  Classical technical analysis would have us believe that descending triangles are bearish and ascending triangles are bullish, and while that might be a decent classification, clearly it is not an absolute fact.  To me, triangles represent consolidation only, and represent areas of balance, wherein we can expect price to burst out in an impulse move at the breakout… though I argue we cannot know in which direction price will break.

Nevertheless, price did break above the 50 day EMA and the momentum oscillator has registered a new momentum high, indicating that the odds of higher prices are more likely than of lower prices… but not before some sort of pullback occurs, most likely to test the confluence support zone when (and if) the 20 day EMA crosses (bullishly) above the (now) rising 50 day EMA.

Continue to watch the Euro, US Dollar Index, and other key currency indexes for insights into how the commodities and ultimately equity markets might react to changes in price trends.

Throughout December, take advantage of the Market Club’s two-month trial membership if you’ve not joined already.  From them you receive education, analysis, scans, signals, and insights from their team.  They do a great job at showing FOREX charts and signals.

Corey Rosenbloom
Afraid to Trade.com

4 Comments

4 Responses to “A Look at the Strengthening Euro Index”

  1. Vasu Says:

    Excellent observation Cory !! I am trying to learn all about the gaps , their significance and the strength of each. Always I study the material/ text books you recommend and they have been very helpful for me. So, could you please suggest me a good resource to get a clear idea about how gaps work

  2. Corey Rosenbloom Says:

    Vasu,

    One thing about the Euro chart above – and the way StockCharts displays data – is that the Euro isn’t as “gappy” as it seems at first – it has to do with how StockCharts.com reports open and close data in line with the NYSE open and close, which doesn’t take into account markets that are open in other time zones – hence the gaps.

    But in terms of gaps themselves, there are four types:

    Breakaway occur after a consolidation move
    Continuation (or measured) occur in the middle of an up-trend
    Exhaustion occur at the top near a price reversal
    Island Gaps are a combo of Exhaustion and Breakaway” gaps that leave a sort of ‘island’ at the top or bottom.

    The best resource I know is Edwards & Magee’s “Technical Analysis of Stock Trends” that was published years ago which is the authority on most facets of TA. I am unaware of a book dedicated to the subject of gaps but if any readers know of any, please let us know.

  3. Vasu Says:

    thankyou very much for the advice cory !! Will sure read the book

  4. Tim Says:

    Hi Corey, from this chart, where would you have put your entries, stops and profit objectives? I was thinking at current price it might be good to take profits as it seems we are meeting resistances at around 137.5? Not sure what you think, thanks.