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Navigating a Possible (Major) Bottom in the Euro

Posted 03/26/2019 7:47AM CT | RJO Market Insights

Over two years ago in 31Jan17’s Technical Blog we introduced the very long-term prospect for the end of the secular bull market in the USD.  The extent and (5-wave) impulsiveness of the ensuing 14-month rally in the Euro above huge former 1.20-area support-turned-resistance arguably broke the secular bear market, identifying Dec’16’s 1.0367 as THE low the market needs to break the negate this multi-year base/reversal count.  Against this backdrop the relapse from 16Feb18’s 1.2580 high may be considered a (B- or 2nd-Wave) correction.

On the heels of an 8-year secular bear market a more extensive corrective rebuttal to the initial counter-trend rally is fully expected.  And thus far this relapse has retraced to within a few pips of the (1.1162) 61.8% retrace of Dec’16 – Feb’18’s 1.0267 – 1.2580 rally on a monthly log scale basis of the contract below.  Additionally and understandably, our RJO Bullish Sentiment Index has eroded to historically bearish levels that have warned of and accompanied major base/reversal environments in the past.

Euro FX Monthly Chart

 

In order to arrest the relapse from Feb’18’s high and as with all downtrends, a confirmed bullish divergence in momentum above a prior corrective high is required.  ON a weekly close-only basis of the cash Euro, 11-Jan’s 1.1467 corrective high stands out as an excellent and objective corrective high and risk parameter the market needs to close above to, in fact, break at least the portion of the downtrend from 21Sep18’s 1.1748 high and possibly the entire 13-month relapse.  This weekly chart also shows the market’s proximity to the (1.1220) 61.8% retrace of Dec’16 – Feb’18’s 1.0453 – 1.2456 rally amidst historically bearish sentiment levels typical of broader base/reversal counts.

Traders are reminded that sentiment is NOT considered an applicable technical tool until and unless the market stems the downtrend with a confirmed bullish (in this case) divergence in mo.  In lieu of such proof of strength we act on the premise that sentiment/contrary opinion is irrelevant and that the market’s downside potential is indeterminable and potentially severe.

Euro/USD Weekly Chart

Euro/USD Daily Chart

Drilling down further to a daily scale however, last week’s recovery above 28-Feb’s 1.1421 corrective high in the cash Euro and above that day’s 1.1522 high in the now-prompt Jun contract, in fact, broke the downtrend from at least 10-Jan’s respective highs.  The important by-product of this momentum failure is the market’s definition of 07-Mar’s 1.1269 low in the contract (1.1176 in cash) as one of developing importance, possibly the END of the 13-month (suspected B- or 2nd-Wave) correction and, most importantly, a precise parameter from which the risk of any bullish decisions can be objectively based and managed.

 

Can we CONCLUDE a major reversal higher after such relatively minor strength?  Absolutely not.  Indeed, resumed strength above last week’s 1.1535 high would be the next litmus test for such a bullish count followed by a recovery above 10-Jan’s next larger-degree corrective high at 1.1722.  BUT until and unless this market relapses below 1.1269, a very bullish count calling for a resumption of 2017’s bull to eventual new highs above 1.26 is arguably in play.

Euro FX Jun '19 Daily Chart

 

Zeroing in further, the 240-min chart below shows Fri’s bearish divergence in short-term momentum below 20-Mar’s 1.1420 minor corrective low.  This relapse leaves Fri’s 1.1473 high in its wake as the latest smaller-degree corrective high and new short-term risk parameter the market now needs to sustain losses below to maintain a more immediate bearish count and perhaps negate our longer-term bullish count with an eventual break below 1.1269.  However, if the market can recoup 1.1473, it will have satisfied the third of our three reversal indicators:

  1. a confirmed bullish divergence in momentum above 1.1522
  2. proof of trendy, impulsive behavior on the initial counter-trend recovery, and, most importantly,
  3. proof of 3-wave, corrective behavior on a subsequent relapse attempt.

These issues considered, a neutral/sideline policy is advised for the time being, with a relapse below 1.1269 negating any base/reversal count, reinstating the bear and exposing potentially extensive losses thereafter.  A recovery above 1.1473 however would reinforce this base/reversal count and warrant cautious bullish exposure with subsequent strength above 1.1535 warranting a more aggressive bullish stance ahead of what could be a shocker of a move higher in the Euro for the balance of 2019.

Euro FX Jun '19 250 Min Chart

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