The euro is again hanging by a thread. Recall it already broke down from and is back-testing a big channel (solid red, below) that dates back to 1997. Its weekly RSI, however, looks like it could have some life left in it.
First, I should make clear that I think the euro zone is toast. The only thing holding it together right now is Germany’s indecision as to whether it’ll save money in the long run by going its own way.
But, one of these days, investors will turn their attention back to the US dollar. When that happens, there’s a fair chance that the American problems will be judged to be every bit as serious as the EZ’s. In the end, it’s a dirty shirt contest and either currency could take first prize — especially if everything starts melting down — stocks, bonds, metals alike.
With that said, let’s look at the charts. A close-up of the weekly chart shows the potential lifeline offered by the RSI channel. We’re clinging to the mid line and a TL off the recent RSI lows.
Prices for the pair are clinging to a fan line off the 2008 highs – seen below as a solid yellow line. This line passes through the .886 Fib line sometime in the next two weeks. It’s hard to chart precisely, but today’s low of 1.2259 is only a bit higher than the .886 of 1.2225. There should be a significant reaction at that point.
A reaction up to test the red channel line around 1.28-1.29 would equate nicely to a 50-60 point rise in SPX to 1390-1404 — our current forecast for equities.
This forecast is obviously a very contrarian view. Just look at the positive divergence on the daily chart. But, I’m trying as best I can to ignore my bias.
The list of things that can go wrong with the euro dwarfs the list of things that might suddenly go right. But, gauging from level of negativism out there (including my own!) any seemingly positive development in the next few days could trap an awful lot of bears. And that, my friends, has been a hallmark of this market ever since last October.
GLTA.
Comments
2 responses to “Update on EURUSD: July 6, 2012”
Seems like a portion of for your short term positive forecast in stocks centers around the reactions of the USD and Euro. Would say the odds today are that the dollar will rise and EURO will fall in the short term. If that possibility happens what would be the tradeable action with stocks? Price targets? Please consider this possibility in your analysis. I would also ask you to revisit the VIX/UVXY which have some nice declining wedges and hose down side appears to be limited.
Thanks for the question, David. CLEARLY, current circumstances are such that a breakdown of markets could occur at any moment.
No question that the dollar is trending higher and euro lower. But, I find it significant that DX couldn’t break its June 1 high — leaving the Bat pattern potential intact. IMO, it’s susceptible to a 5% break here – but this is obviously a contrarian play.
Stocks first line of defense is Fib levels at 1342 and 1344, then the channel lower bound at about 1338, the previous IH&S neckline at 1334, etc. Though the dollar is key, it isn’t the only determinant.
I have to disagree re VIX. I’ve posted about the declining wedge, but it has (potentially) a long way to go before its apex — which is in single digits in September. If it reaches a typical .618, that would place it somewhere around 12-14 at the end of July. This is consistent with the H&S and harmonics targets.
We should see some clarity today around the ECOFIN confab.