Euro Reverses Week to Up; Charts indicate More Upside to Follow

The Euro finished the week higher, but more importantlyposted a closing price reversal bottom on the weekly chart. This patternsuggests that this week’s short-covering rally could be far powerful thanpreviously estimated.

The Euro finished the week higher, but more importantlyposted a closing price reversal bottom on the weekly chart. This patternsuggests that this week’s short-covering rally could be far powerful thanpreviously estimated.

The short-covering rally which began on Wednesday continuedin the Euro on Friday ahead of Germany’svote to approve the massive deal to save the common currency and keep in checkthe Euro Zone debt crisis.

Technically, the current daily closing price reversalpattern usually triggers a 2 to 3 day rally. This part was confirmed by thethree day rally, however, the upside target is usually a 50% to 61.8%retracement of the last leg down. Based on the last range of 1.3342 to 1.2143,the retracement zone is pegged at 1.2742 to 1.2884.

Because the Euro also made a closing price reversal on theweekly chart, another upside target has been established. The weekly main rangeis 1.3691 to 1.2143. The weekly retracement zone targets 1.2917 to 1.3100 asthe potential upside target.

The best conclusion is that the combination of thedaily/weekly closing price reversals indicates that something more powerfulthan just a simple short-covering rally may be taking place. Be prepared formore upside action next week as shorts will continue to cover aggressivelyuntil the Euro reaches the key retracement zones.

Fundamentally, German lawmakers approved the recentlyproposed $1 trillion loan package which should be accepted by investors as ashow of solidarity and a solid attempt to heal public finances. If Germany isgoing to play a major role in the political and economic unification of theEuro Zone, the approval of this historic aid package is most important amid therecent weakness in the Euro currency.

After this week’s decision by Germany to curb naked shortselling triggered a wave of negative publicity, Friday’s approval of thefinancial aid package by Europe’s biggest economy was a strong sign that it isgenuinely concerned about bringing the Euro Zone nation’s together whileshowing its support for the Euro.

With a record amount of shorts in the Euro, the market gotcrowded leading to the current two-day short squeeze rally. The threat of anintervention by the European Central Bank also helped lead to jitters in themarketplace. Even if the ECB does not intervene, the mere threat of theintervention makes investors wary of holding too many short positions. With themain trend down, look for short traders to take advantage of the quick rise andbegin to slow down upside momentum by slowly reentering the market on the shortside.

Revived risk appetite drove the Australian, New Zealand andCanadian Dollars higher on Friday, but these markets were unable to push higherfor the week. The main catalysts behind the rally were the stronger Euro and U.S. equitymarkets. Minor triggers were the threat of intervention and the unwinding ofbearish spreads.

The Aussie closed up for the first time in six days but themain trend remains down. Over the losing streak, the Australian Dollar droppedfrom .8961 on May 13th to today’s low at .8070. Friday’s break took the Aussieto its lowest level since the week-ending July 24, 2009. The lower-low, higherclose formation suggests the start of a possible 2 to 3 day rally with .8728 the next upside objective.

Greater demand for higher risk assets and oversoldconditions also helped to boost the NZD USD. Although this market was not in aposition to form a daily closing price reversal, watch for the start of a 2 to3 day rally with a possible retracement to .6981.

The USD CAD slammed into resistance slightly above the oldtop at 1.0738, reaching a high of 1.0749 before turning south. Overboughtconditions and a strong equity market helped trigger Friday’s profit-takingbreak. The formation of a daily closing price reversal top suggests the startof a 2 to 3 day break with 1.0430 the first objective followed by 1.0354.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More