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EUR/USD - A Multi Time Frame Analysis Points to a Weakening Euro

EUR/USD - A Multi Time Frame Analysis Points to a Weakening Euro

2014-02-12 20:15:00
Research, Research Team
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A confluence of bearish signals across the daily, weekly and monthly charts suggest 2014 could be a tough year for the Euro versus the U.S. Dollar. Here are the signals and the levels to watch.

Key Takeaways:

• Strong bearish signals exist on daily, weekly and monthly timeframes

• Congestive weekly price action indicates indecision could precede a large move

• Price could reach 1.3400-1.3500 before the end of February

EUR/USD Monthly Chart

EUR-USD_-Multi_Time_Frame_Analysis_Points_to_Weakening_Euro_body_Image34.jpg, EUR/USD - A Multi Time Frame Analysis Points to a Weakening Euro

Take a look at the monthly chart in the EURUSD above. The point of note on this chart is the current commodity channel index (CCI) indicator reading. The CCI indicator is a bound indicator, meaning it oscillates between two levels, in this instance +100 and -100. When the indicator crosses above the +100 line or below the -100 line, it can be said to be overbought or oversold respectively. Since an asset can remain in an overbought or an oversold state for a considerable period, traders generally wait for the indicator to cross beck below or above the overbought or oversold levels before they enter. Notice that, on three of the last four occasions (since 2008 highs) a cross below the +100 level preceded a 2500+ pip drop in the strength of the Euro versus the U.S. Dollar. During January 2014, having been overbought since August last year, the CCI reading of the EURUSD fell back across the +100 line. If history repeats itself, which after all is the root of technical analysis, there could be a considerable drop in the pair throughout the next six months. Initial target would be the 50% Fibonacci retracement between the 2000 lows and the 2008 highs just above 1.2000.

EUR/USD Weekly Chart

EUR-USD_-Multi_Time_Frame_Analysis_Points_to_Weakening_Euro_body_Image35.jpg, EUR/USD - A Multi Time Frame Analysis Points to a Weakening Euro

Now take a look at the weekly chart above. This chart shows EUR/USD price action from its reversal point in 2008. The first point of note on this chart is the downwards sloping trendline that has served as resistance in 2008 and 2011. Price has once again reached this trendline, which serves to reinforce the bearish bias highlighted in the longer term, monthly chart. Also of note is the congestion in price since reaching the long-term resistance in December last year. Price has not closed up or down on a weekly basis two weeks in a row. The resulting up-down-up-down pattern represents a high level of market indecision, and could precede a large move when price finally finds a direction. Perhaps offering a clue to this direction is the fact that, following an up week, EUR/USD price has declined more than it rose. This equates to a net decline since reaching resistance, and hints that the resulting direction may be to the downside.

EUR/USD Daily Chart

EUR-USD_-Multi_Time_Frame_Analysis_Points_to_Weakening_Euro_body_Image36.jpg, EUR/USD - A Multi Time Frame Analysis Points to a Weakening Euro

Finally, take a look at the EUR/USD daily chart. This chart shows the congestion zone in a little more detail. The first point is the bearish pin bar that formed as a result of yesterday's trading. A bearish pin bar forms when price opens and closes a session at a similar level, while rising and falling in-between. Because the pin bar represents bearish momentum, traders see the pattern as a sell signal. If a bearish pin bar forms at a resistance level, this strengthens the signal.

The second point of note is the stochastics indicator. The stochastic indicator is an oscillator that helps traders identify overbought and oversold assets. It comprises two lines, a fast and a slow stochastic, which, as their names suggest, respond to price at various speeds. A look at the stochastic indicator in the EUR/USD shows the fast stochastic moving from overbought to neutral. This often precedes the slow stochastic doing the same and, if that turns out to be the case, is a bearish signal. If the downside bias turns out valid, look for price to fall initially to the highlighted area between 1.3400 and 1.3450 before the end of the month.

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