Technical Rebound Triggers Euro Rally

The Euro recovered into the close after testing the low forthe year at 1.2143. If this low holds, then it will mean that last week’sreversal bottom is still intact while indicating that buyers have stepped in tosupport the currency.

The Euro recovered into the close after testing the low forthe year at 1.2143. If this low holds, then it will mean that last week’sreversal bottom is still intact while indicating that buyers have stepped in tosupport the currency.

The best sign that a bottom is being formed and that today’saction was a successful test of the low was the regaining of the Fibonacci retracementlevel at 1.2345. Holding this level could trigger a further rally to the 50%price at 1.2407. Building a fresh support base in this price zone will be asign of higher markets to follow, but the main trend will not change to upuntil 1.2671 is taken out.

A break though 1.2143 will indicate that further downsidemovement is likely with the early 2006 price at 1.1825 the next likely downsidetarget.

The main catalyst behind the weakness in the Euro thismorning was concern that Europe’s sovereigndebt issues were spreading, threatening the global economic recovery.

Traders have been selling the EUR USD since early Sundayevening when Spaintook over a struggling financial institution. The move accelerated to thedownside after the International Monetary Fund said Spain has been too slow tostrengthen its banking system. This statement by the IMF helped createuncertainty in the market leading to the current sell-off.

Technically, the Euro is oversold, but it is going to takean easing of concerns in the Euro region before any of these oversoldindicators will have any relevance.

Tuesday’s action was the first sign that actual buyers mayhave entered the market. This usually happens after the type of reversal we sawlast week. Following a prolonged move down in terms of price and time, thefirst leg up is usually short-covering. The first leg up is 1.2143 to 1.2671.Following a test of a retracement zone or the actual bottom, the next leg up isusually new buyers.

At this time, oversold conditions are battling the bearishfundamentals. In other words, traders know the fundamentals are bearish, butcan’t seem to muster up the courage to short this market again and again atsuch extremely low levels. Since the Euro is in a long-term decline, tradersmust get used to the possibility of whip-saw conditions at times while facinghuge retracements.

Watch for the Euro to try to build a base between 1.2407 to1.2345 then make a run at 1.2671. A breakout over this level is likely totrigger a massive short-covering rally to about 1.2917.

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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