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Like many traders, investors, analysts and newsletter writers, I’m patiently waiting for the US Dollar to drop like a stone. The fundamentals certainly don’t look good and I’m having a hard time finding any technical reasons to be long term bullish on the greenback.
Chart 1 below shows the current market action on the Euro futures contract (EC-Spotv in ProfitSource).
Chart 1
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After a sharp sell off in the second half of 2008, the Euro has rallied from its October lows to be currently sitting around the 1.40 level.
If the US Dollar weakens against the Euro, we would expect to see the Euro futures contract rise in value.
The pattern we are seeing at the moment on this market has been given many names – “triangle” and “wedge” are two of the most common. This means the highs are getting lower and the lows are getting higher, as seen in Chart 2 below.
Chart 2
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Generally when a market forms this pattern, it will wind up like a coiled spring and eventually break out strongly to the upside or downside.
I believe this current pattern will eventually lead to a huge breakout to the upside, but only after the correct amount of time has elapsed.
The current market action is very reminiscent of the pattern the Euro showed after it made its All Time Low of 82.45 in October 2000.
Chart 3 below shows the market action following the All Time Low in October 2000.
Chart 3
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The two scenarios are almost identical in shape, even though they occurred 9 years apart. If you have ProfitSource, it would be worth going back to the year 2000 and analyzing the market action out of the All Time Low.
Chart 4 below shows what the Euro did when it finally broke out of its wedge pattern in mid 2002.
Chart 4
click to enlarge
As you can see, a very strong, long bull market began.
With all the negative news surrounding the US Dollar, we can be forgiven for being a little impatient to see the Dollar fall in value.
However, I wouldn’t be surprised to see one last show of strength in the Dollar this year before the bear move resumes. A rally in the US Dollar means a fall in the price of the Euro. Two levels I will be watching are 1.34 and 1.29, which I have written about on the Safety in the Market Discussion Forums.
Late July or early August will be important places to watch for turns in the Euro, especially if the market is sitting close to important support levels.
If this market breaks out to the upside, resistance is a long way away…
I would encourage students to practice using the Gann Retracement Tool in ProfitSource and to do some Ranges Resistance Cards – first, over the market action from the 2000 low, and then over the current market action.
Learn and understand your Price Forecasting techniques from the Number One Trading Plan, because they will give you enormous insight into what the market is doing and where it is likely to go.
Be Prepared!
Mathew Barnes
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