The euro has started to weaken and possibly enter a downtrend against the US dollar. I first started discussing the possibility of the euro weakening in early May, as a sharp technical reversal occurred in the currency. In hind sight, the super large daily outside reversal occurred during the ECBs meeting and proved to be a strong signal of a top.
Afterward, in late June, with a post titled “European Euro Bulls vs Bears“, I continued to warn investors of a major decision point in the euro/dollar exchange rate. I was swaying towards euro weakness and at the time wrote:
So we are now building towards a major decision point. If the currency breaks its uptrend line, it will be a sign that bears are once again starting to dominate. On the other hand, if the Euro manages to bounce in coming days and weeks, it will be respecting the uptrend still in progress.
Personally, I think it is looking more and more likely that eventually a breakdown will occur. Nevertheless, before I take any positions in the currency exchange rate markets, I will let the price break either direction first.
Chart 1: The euro is breaking down against dollar, after a two year uptrend
Those interested in shorting the euro should pay attention to this week's breakdown of a two year downtrend, as seen in the chart above. Technically, the currency is now entering a downtrend. The ECB and European policy makers insist that the currency weakness furthers their aims, as they think devaluing a currency boosts exports and thus improves economic growth. What can you expect from academics, who wear suits and have been on high socialist salaries all their lives?
Nevertheless, we focus on the price. So while shorting the breakdown might make sense right now, timing is always an issue. Investors should pay attention to risks associated with group-think, as other traders are also piling into shorts as well. Bearish bets continue to grow and sentiment surveys are turning rather negative. Furthermore, the exchange rate has become slightly oversold from the short term perspective (not from the long term), as the price trades two standard deviations away from the 50 day mean.