THE EURO DEBATE

Over recent times much attention has been given to the Euro and the state of the Euro zone. Many analysts (both political and financial) argue, that the Euro is an unsustainable project and will have to be abolished (for many different reasons). The topic has been hot enough to reach the general public.

However, listening to the media and basing trading decisions on their hype is playing another man’s game.

Here, I will argue that it is very likely that the Euro is a good buy at the current levels, and in fact, a prolonged US Dollar bear market is near. Let us first start out with a weekly chart of the last thirteen years:

Since its inception in 1999, the Euro has initially been in an (unexpected) downtrend. But after its circulation as a physical currency it has bottomed out in 2000 and since then been in a steady uptrend until 2008, when the Great Recession hit.  Since then we have been in a stubborn sideways movement in a 3000 pips range. The first thing that we notice here is that over this whole period both the rallies and the corrections have become greater – meaning that the market is in an expanding mode (as shown by the two trendlines). Additionally, the movement over the last three years, as violent as it has been, has come close, but has not penetrated the bottom in 2005. And lastly, with all the talk of the end of the Eurozone, the hit of the Great Recession and “Dollar-flight-to-safety” this pair has essentially gone nowhere and has oscillated with 2000-pip-swings over and over for the last three years. In fact, anti-Euro sentiment at January’s bottom was the most extreme during the last three years! Not only is this indicative of a strong and resilient market, but in fact gives plenty of room for an upside break.

Now let us get more technical here:

If we start measuring the weeks between successive tops and bottoms, we will notice that an intricate 92 week cycle (and its harmonic multiples) is in play. Using the 2004-05 correction as a measurestick, we see that a precise 2x2 price/time expansion has recently finished during January’s low (when sentiment was most extreme). This gives us a very reasonable assumption, that this low might not be broken significantly anymore in the coming years and we are on the verge of a cyclical bull market.

 

Ideally, we would also be able not only to identify price and time extent of the correction, but also its structure. This is also indeed possible and we can label this correction as a limiting contracting triangle in NeoWave terms. In order for this pattern to classify as such and give us any hint for its completion, multiple Fibonacci connections must be measurable between successive waves – Indeed, the pattern does fulfil its requirements (click on the image for details). From this analysis we can assume that we are in the last stages of the short-term downtrend (Wave E).

On a four-hour chart however, our suspicion, based on behavior, structure and time is confirmed, that the short-term trend is still down and we can expect a 700 pip drop during the coming month from current levels. During the next days several typical harmonic intervals fit together to indicate a highly probable trend reversal.

Also, a 130-day rolling cycle, that has been in play since 2008 and has connected most of the major highs and lows, indicates a trend reversal during the start of the week. This cycle has operated very precisely over the last four years and there seems to be no reason to assume otherwise for the future.

From a trader’s perspective however, no trade is cast in stone and it is all about probabilities; a definitive change in trend is required for a high-probability trade. So let’s see what condition we could find that would tell us that a definitive change in behaviour has occurred:

With some basic measurements we find that the biggest decline over the last two weeks has been 157 pips (or 1,19%) and a trendline has connected the last three bottoms. Additionally, the market has been in an expanding state, but now the rallies seem to be getting smaller, as overhead resistance is encountered and the time cycle is running out. Therefore, any price movement which goes beyond those measurements should be taken as an opportunity for aggressive sells.

In conclusion we can say that a high-probability high should be in place in the coming days, which would lead to an aggressive selloff to 1,28 area. From thereon a prolonged sideways movement is possible, however the risk of a multi-year bottom is high and would cause us to look for tactical long-term long positions. Updates as and if we get there! Happy trading!