Long Term Structure of the Euro Index

Dec 31, 2008: 12:21 PM CST

To follow up on a reader’s request to analyze the Euro Index, I present the monthly and weekly ‘fly-by analysis’ of the Euro Index to see where we’ve come and where we might be headed.

Euro Index Monthly:

The general relationship of the Euro Index to that of the US Dollar Index is inverse – in that when the US Dollar moves up, the Euro moves down which derives more from relative strength among other factors.  What’s good for the Dollar is generally bad for the Euro, though that oversimplifies the relationship.  The Euro Index is also is closely tied to certain commodities as well.

The Index bottomed in 2002 just ahead of the US Stock Market and began a stellar rise as the US Dollar began its equally stellar downtrend.  Notice the triple-swing positive momentum divergence that preceded the actual price reversal.  Notice also that we have that “super confluence” zone occur when the 20 and 50 EMAs cross and price finds support in the “cradle” of their crossing.

Price then moved into a “Three Push” pattern (which is a reversal pattern) that terminated in early 2005 on a triple-swing negative momentum divergence (the hallmark of the pattern).  This also completed a full fractal Elliott Wave impulse that terminated perhaps in the First Wave.

Price then formed an “ABC” Correction into 2006, terminating at the rising 50 month EMA which provided an excellent opportunity to ‘buy a pullback’ in a strong trend.  Had price failed at this level, it would have officially called into question the uptrend.

Price then re-emerged into the 5-wave fractal Third Wave which terminated right alongside crude oil and other commodities around July 2008.  I’ve broken down this recent move on the weekly chart below.

Euro Index Weekly:

The first green arrow shows the bullish crossing of the 20 and 50 EMAs which resulted in a “Cradle Support Trade” (if anyone has a better name, please let me know) after the 20 EMA rose above the 50.

Price pulled back in corrective wave 2 back to the rising 50 EMA before launching a powerful Third Fractal Wavae that took us to the end of 2008 before moving into a quick “ABC” Corrective Wave 4.

Price surged up to new index highs in mid-2008 though the bulls could not hold on, as a double-top formed on a negative momentum divergence at the completion of the final (fifth) fractal wave and price then broke support via the 20 and 50 EMAs.

The “Cradle Trade” occurred again, though on the flip-side which I’ve higlighted with a red arrow.  The 20 EMA crossed under the 50 EMA and price rallied (retraced) to test this zone though it was met with significant resistance, formed a doji, then collapsed during the severe market conditions of the latter half of mid-2008.

Price formed a new momentum low and rallied sharply up to test Fibonacci resistance and the falling 50 week EMA which is currently – though tenuously – holding as resistance.

In terms of the Elliott Structure on the monthly chart, possible Wave 4 has violated (entered the price territory) of Wave 1 which underscores the violence (and volatility) of the recent down-swing in the index.  This should not happen in classic Elliott.  However, if that count is correct, then we would be in a large-scale 5th wave potentially which would eventually challenge the $160 highs again – though that is far from certain.

Continue to watch the Euro Index and how it relates to Commodity Indexes, the US Dollar, and ultimately the US Stock Market – or FOREX traders can use Euro analysis to profit direction from relative currency valuation changes.

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Corey Rosenbloom
Afraid to Trade.com

5 Comments

5 Responses to “Long Term Structure of the Euro Index”

  1. Vasu Says:

    Corey !!
    Congratulation once again on your CMT success. If I read your story about the way you started and then your recent post about your CMT success.. I myself feel so proud of you and that you can be idolized as a role model for all the ambitious people of all fields . A JOB WELL DONE !!!

    Now a couple of queries :

    (1) As you said that the euro helps some commodities.. could you please explain what commodities have a direct correlation with euro and any logical explanation for why it is so ?
    (2) Secondly I’d like to know your list of your “bell weather ” stocks in each sector. I mean that I look at INTEL corporation to get a feel of semi conductor industry.. Likewise do you have any list to cover the entire market sectors?

    regards
    vasu

  2. Corey Rosenbloom Says:

    Vasu,

    Big questions! I’ll look into them more and try to give a fuller response, but I’m just noting the correlation between them. Correlation does not imply causation. Commodities are inverse the dollar usually and currencies are quoted in relative strength terms (FOREX) hence what’s good for the dollar is relatively bad for the Euro in a broad sense.

    The bellweather stocks question is a whole blog post in itself! I don’t do much sector trading currently and it’s possible that some leadership has changed so I’ll have to get back on this question as well.

  3. david Says:

    Corey,

    I think the Euro is making an ABC having completed 5 and is ready for a 5 down ?

  4. Corey Rosenbloom Says:

    David,

    I toyed with the idea that the recent 3 waves were corrective in nature but rejected it because the data were incomplete with the Euro chart beginning in 1992. It’s possible yes but it just seems like the recent move, which overtook all available info on the chart, was stronger than the prior down-moves and so I ruled in favor of an “impulse” wave rather than a large-scale corrective wave.

    It’s possible I suppose that it is a perverse Zig-Zag that will resolve now as you suggest with 5 waves to the downside but we’ll need to see where this current swing takes us for clues.

  5. david Says:

    Thanks Corey im bearish on the euro in any event short term . We have a way to go to zero with rates and not all our bad data is out there, inflation is almost at the ECBS target of 2% so im expecting cut of 50bps in mid Jan. I should get round to blogging so ill do something on the euro.

    Happy new year!