Thursday, March 27, 2014

XEU Euro Weekly Chart Rising Wedge Negative Divergence

The negative divergence spank downs were easy enough to identify as the euro keeps printing new highs (red lines). Europe needs a weaker euro to boost the manufacturing and export industries and help the troubled continent recover. Many traders are surprised that the euro remains so strong. Everyone pauses at each word Draghi speaks waiting for the tiniest hint that he will implement a stimulus program which would bludgeon the euro. But Draghi remains coy dancing on both sides of the street. The inevitability appears to be a weaker euro but as always what is the timing?

An ECB meeting is coming up fast in the days ahead so that will create the typical Thursday morning drama. The chart above favors the bears due to the long-term rising wedge. The drops from rising wedges can be quite dramatic. Price violated the upper standard deviation band (pink) so a move to the center band is on tap and this is the 20-day MA at 1.3683. This would also be a test of the lower rail of the rising wedge, a critical juncture (blue circle). A bounce, or die, decision will occur. Moving into April and May, since the central bankers are in collusion, the Fed, BOJ and ECB, the Bank of Japan may try to launch markets with more QE. This may further take the heat off Europe and allow Draghi to remain coy. The euro would favor another move higher to the top rail of the wedge. But it does seem inevitable that, say, by summer time, the euro should be weakening.

The lower band target is 1.3454. The 50-day MA is 1.3423 and the 200-day MA is 1.3346 both are downside targets. Keystone is currently short the euro with EUO and will likely trade in and out moving forward for the months ahead paying attention to the potential near term drama at the blue circle at 1.36-1.37. Many folks expect a weaker euro and perhaps as soon as in the days ahead with a stimulus plan from Draghi so this typically means it will not occur. Perhaps the strong euro drama will continue through April into May. If so, the euro can probably be re-shorted from the top part of the wedge at 1.38-1.40. Of course if the bottom rail of the wedge fails at 1.366-ish, the euro can drop to the 200-day MA in very quick order. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

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