August 10, 2009

Euro Currency versus US Dollar

The daily bar chart above demonstrates classic signs of divergence. A cyclical study is plotted in time and price (blue horizontal and vertical lines in the price action area), as well as a 14 period RSI (with horizontal support and resistance zones). An Ichimoku cloud is also plotted, accompanied by a 150 period moving average.

Note that at the apex of the last devaluation of the US Dollar, near 1.6000 Euros, a double top formation ensued. This pattern formed over the course of three months, from April 2008 through July 2008. However, danger signs were clearly present when strong divergence appeared between the high in March 2008 and subsequent higher high in April 2008. The values for the date, high and close were as follows:

Divergence:
17 Mar 08 = High 1.59037, Close 1.57291
22 Apr 08 = High 1.60184, Close 1.59904

Double Top:
22 Apr 08 = High 1.60184, Close 1.59904
15 Jul 08 = High 1.60385, Close 1.59114

When the EURUSD bottomed in October 2008 at 1.23287, the market also showed an instance of divergence. When price broke above both the Ichimoku cloud and the 150 period moving average in April 2009, a new trend was announced. Technicians, however, should now be on the lookout for at least a near term consolidation in the Euro's advance against and eroding dollar. While today's cloud support stands at 1.40973, the next three support and resistance targets are as follows:

Cycle support = 1.41468, 1.39594, 1.37731
Cycle resistance = 1.43355, 1.45254, 1.47166

Of particular value on this chart is the manner in which the currency pair tends to move in either bearish or bullish support and resistance zones in the 14 period RSI. Though the market sharply reversed the initial advance off the October 2008 bottom, the low in March 2009 held the critical bullish support level in the 14 period RSI. Additionally, this occurred at cyclical support of 1.25049. While a higher high was made just last week, the bearish resistance zone in the 14 period RSI held - accompanied by divergence.

Whatever the outcome of the current bullish Euro market, or the oft-reported erosion and debasing on the US Dollar, technicians should remain unemotional in their approach to analyzing this currency pair. The next cyclical date of significance is 12 Sep 09. Plan to watch price action and the corresponding behavior in the 14 period RSI for clues as to the market's next move. Any combined break of both the Ichimoku cloud and the aforementioned support targets will spell trouble.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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