Should we trust the rebound in EUR/USD?

Monday’s sharp reversal in EUR/USD following Renzi’s defeat in the Italian referendum may have caught many by surprise. Pundits are wondering whether the EUR has bottomed out (and the USD has topped out) at least for the near-term.

Chart experts say Monday’s candlestick is the exact opposite to the one seen on November 9.

Daily chart

eurusd.jpg

Source: Netstation (www.netdania.com)

  1. The pair dropped 400 pips or so following the November 9 candle.
  2. Given, the Monday’s candle is the exact opposite of the November 9 candle… should we expect the pair to rally to 1.12 (400 pips or so from Monday’s close of 1.0756).
  3. Sell the rally… as Monthly chart looks bearish
  4. Looking at the monthly chart (line chart), I feel the common currency is heading lower to parity by Q1-Q2 2017.

Monthly chart – Line chart: Bearish flag pattern

eurusd weekly.jpg

Source: Netstation (www.netdania.com)

  • The chart above shows falling tops (from 2008 high) followed by a bearish flag pattern.
  • We also have a falling channel which is seen offering support around 0.9950 and 0.95 levels.
  • We already have a bearish break from the bearish flag pattern, which suggests the doors are open for a sell-off to parity… unless the bird closes back inside the flag on Dec 31st.
  • DAX on the verge of a bullish breakout…  signals that EUR could be heading to parity.

Weekly – DAX and EUR/USD comparison

dax and eur.jpg

Source: Netstation (www.netdania.com)

  • DAX and EUR/USD have been inversely correlated since early/mid-2014. From mid-2012 to early 2014… rising EUR/USD was a sign of Eurozone stability… hence the direct correlation.
  • However, on a broader time frame – from 2008 – the correlation is largely negative/inverse.
  • As of now, the DAX is trading above the key resistance if 10,800. We have had the breach of the falling trend line followed by a rising lows and now a break above 10,800. Thus the index looks set to rally.
  • The bullish DAX technicals only suggest that the bounce in the EUR could be a trap.

Bearish view is at risk only if the EUR/USD reenters the flag on Dec 31st.

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