Will Friday's Reports Reawaken the Euro Bears?

Equities markets have correctly anticipated the recovery from the panic low that culminated last winter.

Markets have a way of going too low and too high. The final 1700-point plunge in the Dow last February and early March was the capitulation of the bulls, and probably took the market too low. So far the rally, which has exceed 50% granted from a very low base, has been orderly.

Thursday's US fundamental news was mixed, with unemployment claims higher than anticipated. Leading economic indicators expanded for the sixth month in a row, which makes experts think the economy will be expanding going into 2010. The naysayers contend this is merely a rally in a bear market. What if the bears now capitulate and this orderly bull market blows off to the upside? The market's function is to trick as many people as possible.

We have a gaggle of European economic reports due Friday. At issue is the intensity of the European recovery and the extent to which the weaker dollar has hindered that recovery and impacted the trade balance. Thursday morning the Euro current account came in at a -1.3B Euro down from an anticipated + 1.9B and a previous period of 3.7B. If some of the numbers Friday come in on the light side of projections,we may end up with Central Banker Trichet and associates amplifying their complaints about the volatility of exchange rate.

The Euro has been in a solid uptrend versus the dollar for an extended period (click to enlarge).

On May 13 we had a crossover of the 18 day over the 40, and this trend is still in place. This crossover alerted you to trade this pair from the long side. Now add the Bollinger bands and this gives you some entry and exit points.

After the May crossover, the market gravitated to the upper Bollinger band, which indicates the strength of the market. The strength during the first three weeks did not give you an ideal long opportunity on the daily charts, but during that period you could have used a shorter time frame to locate an entry point.

On the occasions when the price sold off to the middle of the range, this was a buying opportunity. Currently the pair is trading at about 1.50, some 200 points over the middle of the range. Open interest in the futures market has been building as new specs buy the rally. The open interest at the CME went up 6573 contracts Wednesday.

Should the reports Friday prove bearish and we chase some of the new longs out, look to buy in the 1.48/ 1.4850 area. The trend remains in place, so it is best to go with it.

Comments

[HawaiiTrader:]

I agree that the trend is established, and best followed as opposed to fought, but I must say the way in which you begin this article talking about how well the markets have anticipated recovery is just completely asinine. Sorry. The markets have anticipated nothing. The governments and central banks of the world handed over all the money requested (and more), showed their full deck of cards, and to top it off has even made promises and predictions that they know fully well are not going to happen. It has gotten to the point that even the equities market is clearly pricing in things which obviously will never happen. For example, the US government's plan for recovery could have been created by a 3 year old: inflate the economy so it grows. Really? Thats it? The mathematical expectations associated with such naive planning assumes that the US economy will expand at GDP growth numbers of about 3.5%-5% for TWELVE STRAIGHT QUARTERS. That right, 12 of them in a row. Back to back. This, mind you, has never come to pass, and the closest we have ever come was a period during the housing boom in which we had 3 quarters back to back of +4.0% growth. I can't wait until each and every last sucker has been draw in, and each and every last Wall Streeters has convinced themselves that legal accounting gimmickry (FASB) and 0% free money from the government (historic quantitative easing) means they have actually done something of a material nature to create sustainable recovery.

Oct 22 10:49 PM