Wednesday, November 2, 2011

Euro Gets Stopped at the 61.8% Retracement

The short covering rally in the EUR/USD since October ran up about 1000 pips and got stopped cold right at the 61.8% retracement of the larger downtrend in place since May 2011. Pretty amazing how these fibonacci levels work in the markets, especially currencies. The 1.4250 level has been a huge level of interest for the past year as this was where the Euro topped out in late 2010 and then found support throughout mid-2011 as the currency made a major top before falling to 1.3145.

Now after the bounce back to resistance it failed and slipped back below the 200 EMA which sits at 1.3955 on the daily. The daily chart has flipped back to a short term sell signal based on the color of my TTM trend bars and if it doesn't recover the 1.4000 zone soon it should continue a multi-month decline. 

This is even more significant based on the fact that the weekly chart is possibly forming the right shoulder of a bearish head and shoulders top with the slanted neckline shown below coming in near 1.3400.

This definitely depends on the direction of the dollar as well but I think in the intermediate term there are more downside risks to the Euro than the US buck. It will be interesting to see where the Euro goes into year end but last week's blowoff top at 1.4250 has all the makings of a important high that we might look back at in 3-6 months. If it does actually breakdown I can see the EUR/USD at 1.25 to 1.2750 very easily as initial targets.

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