XEU Euro Daily Chart Oversold Falling Wedge Positive Divergence Potential Island Reversal

The euro is dropping towards a 1.30 handle while the dollar index prints 83 this morning. The higher dollar is smacking oil and gold lower. The big event this week is the ECB's rate decision and press conference on Thursday morning. Draghi's words will create a wild reaction in the euro and directly affect the dollar. Traders are sending the euro lower anticipating stimulus but the October meeting is a more likely target for Draghi to fire the money bazooka. The level of shorts against the euro is at the highest levels in a couple years. Even Aunt Nancy, fresh back from driving the local school bus, said she took here entire life savings and is shorting the euro. Traders are all-in expecting a huge stimulus announcement by Draghi. Obviously the risk on Thursday morning is that Draghi under delivers and the euro catapults higher and dollar collapses. A rise in the euro would kick in short-covering that would rocket launch the euro with shorts running for their lives (the euro weekly chart remains weak so lower lows in euro would be expected after a relief rally occurs).

The euro chart was posted last week looking for a bounce which occurred but you need a magnifying glass to see it three days ago (this chart is one day behind). Price is currently trading at the blue dot. The expectation would be that the jog move would create positive divergence with the MACD line but it has not. Thus, a bounce is needed but the euro needs to take one more look at the lows currently printing. Then all indicators should be positively diverged (green lines) and create a more sustainable relief rally. Price is on an island now after collapsing through the 132.0-132.5 gap so an island reversal pattern would be in play as price moves back up to 132 from the underside. An island reversal would send the euro straight back up through the gap from 132.0 to 132.5 in a flash.

So the daily chart above is almost set up for a strong relief bounce that will likely be further fueled by short-covering. This may coincide with the ECB on Thursday morning. The weekly chart remains weak. The stochastics on the weekly are oversold and positively diverged which will help the daily chart create the relief rally. The RSI, MACD line and histogram are weak and bleak on the weekly chart wanting to see lower prices for the euro in the weeks ahead.

What does all this mumbo jumbo mean? In the short term, the daily chart wants to create a relief rally back towards 132.0 and 132.5. Price may recover very strongly depending on how many shorts throw in the towel. Weakness should resume, however, and cause the euro to leak sideways with a lower bias for the weeks ahead. In the intermediate term, weeks and months, the euro will likely travel through 1.28-1.33, and perhaps bottom at 1.28-1.29 in October, however, the chart will be reassessed many times before then. 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.

Note Added 11:11 AM on Thursday, 9/4/14:  Draghi surprises markets firing the QE money bazooka and lowering the key benchmark rate essentially to zero adopting a ZIRP policy. The euro collapses to 1.2997 and deteriorates further down to 1.2964. European indexes run higher. US stocks print new all-time highs. The dollar index jumps well above 83 in reaction to the euro dropping. Oil and other commodities trade lower due to the rising dollar. The euro collapses for the daily chart above with the massive amount of euro shorts celebrating with high-five's. Knife-catches and bottom-calling in the very short term can be tricky as the euro continues to stab lower but as highlighted above weakness was expected to continue due to the weekly chart. The stochastics are oversold on the daily chart which will help create a bounce. The RSI, histogram and MACD line all print lower lows on the daily chart now so price will need to stabilize at these levels for a day or few before bouncing. The same basic analysis holds as explained above except that a bounce, potentially fueled by short-covering would occur only after the RSI, histo and MACD set up with possie d (a few days). The euro should leak lower moving forward now that the QE bazooka is fired and after playing around at 1.295-1.300 in the coming days a bounce would be expected but then further weakness will follow. The bounce may target the huge gap created today at 1.305-1.310.