Euro Technical Analysis

Friday, January 4, 2013, Marketing Communication Euro, Monthly Please click image above for larger version The euro monthly chart above shows how the currency has had a relatively strong performance over the past 10 years despite the wider concerns in the past few years. Retracement levels can often prove useful in FX trading and the lines calculated from the 2000-2008 highs seem to have caught much of the price action, red lines. The sell-off in 2010 for example, and the moves lower last year, found support off the 1.2134 area, the 50% level. So for the longer term the outlook on euro looks strong while this 50% level holds. As a result any moves down to this area would be seen as attractive longer term entry levels. Breaks under this major long term support would start to suggest more serious full retracement back towards the 0.8233 lows, as the general trend would appear to be 'turning over' somewhat. In summary then the currency is in a natural and expected retracement range following the strong trend posted from the turn of 1999. Only a break under 1.2134 would negate this relatively optimistic outlook. A confirmed move above the 1.3055 area opens up a much more optimistic outlook for H1 2013. However the currency does look vulnerable to a possible return move to 1.2134 in the near term. Euro, Weekly Please click image above for larger version Moving down to the weekly timescale the outlook is more cautious, due to the lower highs over the past few years as each new euro-area crisis crimps the level of buying interest. The moving average on this chart is interesting, showing a clear cycle over the past few years. The recent trend line break higher, red line, would seem to follow the expected cycle higher. So while the euro stays above the 1.3025 region the medium term outlook looks positive suggesting the cycle seen over the past few years is set to continue. Traders do need to be wary however that a failure for the price action to hold the recent slight gains could trigger a relatively rapid move in H1 2013 back towards the 1.1877 lows. Euro, Daily Please click image above for larger version Drilling down to the daily chart we see this last leg higher in more detail. Drawing retracement levels on this near term move, red lines, we can see how the weakness in November was not significant enough to decisively break into the retracement range between the 38.2% and 61.8% levels. (1.2741-1.2471). Following this retracement support the euro rallied back to its September highs at 1.3169. So the currency has posted a decent recovery from July, found support at the 'expected' retracement, and gone on to post fresh higher highs. So clearly the near term momentum is positive. The very short term view however is more cautious as the price action has just broken down through the old resistance level, 1.3169, which had been offering some near term support. The currency does now look vulnerable to possible short term weakness, down towards 1.30, the tentative medium term trend. Due to the positive trend over recent months the risk/reward on shorting the graph here does not look favourable. Leaving a positive overall outlook, with a hold stance, moving to a buy stance on any near term weakness bringing the euro back down to the bullish trend, red line. Moves under the trend line would start to negate this relatively optimistic view. Moves under 1.2739, the 38.2% retracement level would be needed to turn more negative. 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