Bearish Euro Signals Build as Currency Endures Another Rough Day

  • Technical trading patterns are pointing to more potential pain
  • Common currency is headed for first losing month in seven

ING's Patel Sees Technical Correction in Euro-Dollar

The euro’s miserable month may not be over, if trading patterns are anything to go by.

The common currency hit an almost six-week low versus the dollar on Wednesday. While the day’s move may owe more to greenback strength than regional concerns, it follows losses in the wake of the German election and sets the euro up for its first losing month since February.

Unfortunately for bulls, technical analysis of the currency’s trading charts offers little comfort on its short-term prospects:

First, the euro’s 233-monthly moving average has capped its advance for the second time in as many months. A look at the chart underlines how strong this gauge has proved in the past.

And after failing to sustain a move above $1.20 at numerous attempts, the euro headed lower and has dropped below a support at $1.1850. This completed the breakout of a so-called head-and-shoulders pattern, a signal to analysts of a trend reversal. Given the high on Sept. 8 at $1.2092 and the neckline since an Aug. 31 low at $1.1823, this breakout suggests a price target near $1.1600.

Meanwhile a series of other studies have turned their back to euro bulls. DeMark’s TD Sequential -- a type of indicator designed to anticipate market bottoms and tops -- suggests that the euro may see fresh lows this week before pausing. Bloomberg’s Trender Indicator has turned bearish, while the Fear-Greed measure shows that bears are now in control of price action for the first time in three months.

The common currency also closed below its 55-day moving average on Tuesday for the first time since April. Its Psychological Line -- which reverts from the euro’s most overbought levels in three years on a monthly basis -- is indicating that a long-due correction is now under way.

But all hope is not lost for bulls. The euro’s volatility skew points to the currency eventually resuming its uptrend -- possibly when confirmation comes from the European Central Bank regarding tapering of its quantitative-easing program. The skew, a measure of market sentiment and positioning, shows investors still prefer euro calls over put options.

(Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.)

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