by Pinchas Cohen
On July 3 we forecast that the euro would cross over its 2-year downtrend line against the dollar.
Today, it’s set to make its fourth close above the trend line since July 14. This satisfies two time filters against a bull-trap, in the event of a failure, should the price fall back below the trend line. The first time filter would be a Friday close above the trend line, which would signify investor confidence in weekend exposure when anything can happen. The second filter occurred yesterday with the third close above the uptrend line.
In terms of a price filter, the price advanced yesterday to 1.13, but closed only 0.85 percent above the trend line. The typical price filter ranges between 1 and 3 percent on a close. So while a time filter has been satisfied on two levels, the same cannot be said about a price filter.
The euro has been rising on the eurozone’s economic growth, sometimes in stark opposition to the rest of the global economy. The euro area is so strong in fact, that Europe has taken over China’s role as the reflation leader.
All Eyes On Tomorrow's ECB Meeting
The ECB is widely expected to keep its interest rate unchanged at 0.00 percent. Draghi’s Sintra speech last month was interpreted as a signal for an earlier-than-expected tapering. That, along with recent bullish remarks, drove the euro to a 14-month high of $1.1583 yesterday.
Some traders are cashing out ahead of the meeting, adding mild pressure ahead of the ECB press conference after the meeting and sending the single currency's price lower. After reaching today’s low of $1.1515, the euro rebounded to 1.1530, a 0.14 percent decline from yesterday’s close.
Perhaps it was a Reuters' report citing unidentified sources saying that the ECB in fact intends to keep QE open-ended that provoked some profit-taking. The fact that such news didn’t send the euro much lower – and more importantly, didn’t send it back below the 2-year downtrend line, at $1.1450 per today’s angle, is very bullish for the pair. Either traders don’t buy the report, or they simply don’t care.
If they don’t buy it, there's obviously the surprise potential, with a downside risk. However, if they don’t care because they are buying the pair because of economic growth, there is no such risk.
From a technical standpoint, the $1.1450 broken downtrend line is an expected support, as well as the uptrend line since April, which is rising toward that same price level, protected by the 50 dma (green) beneath it, at 1.1256. Note how the 200 dma (red) rushes to support the lower uptrend line since the beginning of the year, while the 100 dma (orange) stands in between them.
Target Implications
The target implications of overcoming the 2-year downtrend line are 1,000 pips, or 8.75 percent, the size of the price action beneath it. This could happen as quickly as 6 months to a year from now. When major key level prices are broken, there is a propensity for sharp, rapid moves.
Trading Strategies
Conservative traders should wait for the market's reaction to tomorrow’s ECB event, at which time disappointment may send the euro within a return-move for a dip-buying opportunity toward the 6-month 1.1360 uptrend line to the 2-year 1.1450 downtrend line. Alternatively, a hawkish/bullish message is likely to satisfy the price filter, as mentioned above. Also, the RSI may temper its high reading, which invites a downward correction.
Moderate traders may wait for the meeting, to see which way the wind blows, or may have already entered a long now, with a stop-loss beneath the key prices previously mentioned.
Aggressive traders may enter a short with a stop-loss above yesterday’s $1.1583 high, to ride a potential return move, while simultaneously entering a long position with a stop loss as previously mentioned.