From the September 01, 2009 issue of Futures Magazine • Subscribe!

Tech talk: Euro bulls ride to 2009 high?

A day after the U.S. Commerce Department released its initial Gross Domestic Product (GDP) figures for the second quarter, the September euro currency rallied 177 tics to 1.4250 trying once again to test the 2009 high of 1.4327 of June 3. Yes, the initial GDP figures showed a better than forecast drop of 1%, but traders focused on the decline in consumer spending of 1.2% from the previous quarter’s increase of 0.6%. Why? Without support from the consumer, the likelihood of a strong recovery diminishes greatly, hence the retracement in the dollar. Comments from the International Monetary Fund stating they believed the dollar was “moderately overvalued” added to the increase in selling pressure. Yes, on any given day, fundamental news can swing most markets, which is why technical analysts rely on price movement and chart patterns to forecast future market moves.

As we can see in “Euro climbing,” prices have traded in a consolidated range (grey area) of approximately 6.15¢ since May 22. Prices retraced from their June 3 high to our .382 Fibonacci retracement support level of 1.3775 on June 15 and have continued to move higher. The close above the .382 Fibonacci level on June 15 of 1.3775 triggered a short-covering rally that resulted in a higher close of 1.3834 on June 16, just as our Slow Stochastic indicator was looking to emerge from the oversold level of 20 (see chart). Remaining shorts realized the fact that if it can’t go lower, the path of least resistance is higher. Value buying sent prices higher, resulting in a change of short-term trend on June 30, as the 10-day simple moving average (SMA) crossed over the 20- day SMA.

Traders looking to buy dips found an opportunity on July 8, as the euro retraced to and found support at our 50-day SMA of 1.3832 and Stochastics indicated oversold. The euro benefitted from a stock market rally that began on July 13, as traders increased risk appetite and rotated out of the safe haven of the dollar. The end-of-month equity rally sent the dollar index to a nine-month low of 78.35 and the euro to a close of 1.4254. While the euro is technically overbought at these levels, we look for corrections as buying opportunities.Moving ahead into September, we look for the euro to challenge the .618 Fibonacci retracement on the weekly chart of 1.4442 and target the Sept. 22, 2008 high of 1.4607.

Bob Kozak is the senior currency analyst, CTA and managing principal of C3I Capital Management, LLC. Reach him at bkozak@c3icapital.com.

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