Euro Weakness threatens Reversal Bottom Formation

Although the EUR USD is trading lower this morning due tocontagion fears in the Euro Zone, this morning’s sell-off may only be ashort-term correction of last week’s spectacular rise.

Although the EUR USD is trading lower this morning due tocontagion fears in the Euro Zone, this morning’s sell-off may only be ashort-term correction of last week’s spectacular rise.

Over the week-end, Spain’s government took over afinancial institution, renewing fear that the financial crisis in the Euro Zoneis spreading. The first reaction by nervous traders was to sell the Euro.

Technically however, the current break may only be acorrection of last week’s range. This makes 1.2407 to 1.2345 key support thismorning. Traders should watch for a possible technical bounce in this zoneespecially if it begins to appear that the action by the Spanish government hascontained the problem.

A failure to attract buying in the retracement zone meansthat new shorts are likely to drive this market lower. Renewed selling pressurewill also serve as a sign that the recent rally was only a short-squeeze ratherthan new longs.

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.

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

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