In my prior posting on Friday, June 5, 1.3750 – 1.3800 was posted as the most probable downside target for EUR/USD. This target was achieved with a great precision on June 8, 2009. The chart below shows that EUR/USD bounced back up from 1.3805. The same chart also shows what has happened since that dip. EUR/USD is now back up above 1.4000.
In the chart below, we can see that 1.4100 acted as strong support initially. Once busted, the move to 1.4000 came very quickly. Now on the way up 1.4100 is acting as a resistance. The first attempt to bust to the upside was rejected on Wednesday morning. In the Globex session, EUR/USD has started to move up again and should challenge 1.4100 overnight or Thursday morning. If busted, the initial target will be 1.4300, which should take SPX to 960-970 region.
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Let us look at the monthly chart for EUR/USD. This shows a very clean trendline that is supported by corrections in late 2005 and late 2008. Below that is the daily chart, which shows two more support lines, Line3 and Line1. Line3 is a horizontal support line at around 1.3750 – 1.3800. Line1 is the line that has supported EUR/USD in this rally from March lows. And finally Line2 is the longer term support time. We will definitely visit 1.3800, which will take us to SPX 900-910. Visit to Line1, around 1.3500 should take us to 880, and finally if we make a visit to the longer term line, Line2 (which is VERY UNLIKELY IMO), then we will get to 790-820.
Folks all over the blogs are wondering – why the heck are we going up, up and only up. This article is in a series of two articles. Here I want to show you why we are going up. And then in the second article, I will prove to you that we are not necessarily going up.. In fact, we might have gone down quite significantly over the past week or so
Below is the 2-hour chart for EUR-USD (EUR-USD accounts for more than 60% of the dollar index.. so I have chosen to focus on that only and not on the dollar index for now). You will notice that EUR-USD has been in a perfect upward channel since early mid-April. And as long as it continues to be that way, we will continue to melt up in higher.
For any significant downward move in the indices, this channel has to be broken conclusively. At this point, it would amount to first breaching the channel, which would be going below 1.4100 AND in my opinion taking out 1.3800 (which is where the previous bounce up point was). Going down to 1.4100 should take us to 930 and down to 1.3800 will take us to 910 region.
Ok, now I have talked a lot of facts, which a lot of you already knew. Where is this chart headed next? IMO, the reversal is quite near. And here is the reason why? I am a big believer of sentiment, and extreme sentiment often creates tops and bottoms. Today, everyone, almost everyone knows that dollar is tanking.. even the newspaper boy (no offense intended here) knows that… Everyday there is some headline talking about how dollar is continuing to tank. When something becomes a household/common talk, it ceases to be the reality. (Some fascinating examples that I have read elsewhere of extreme sentiment: (a) The day FOX launched their business channel was the top of S&P 500 back in 2007, (b) Back in late 2007, there was an article in newspaper that said that in Google even the person who offers massages to employees is a paper millionaire now – guess what, that day marked the peak of Google stock price).
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Here is the chart that plots both the ES futures and EUR/USD. You can clearly see that the “direction” of the moves are very highly correlated. Note that magnitudes may not be, but the direction is clearly correlated.
