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REVERSAL


The Euro's Diamond Top

04/25/03 01:08:59 PM
by David Penn

An important test of top awaits the euro.

Security:   @EC
Position:   N/A

When people talk about how badly "the markets" have performed over the past year, insightful money managers like Hong Kong's Marc Faber are quick to note that it depends on which markets are being discussed. For example, owners of euros have seen their holdings appreciate dramatically against the dollar. After turning in a 19% performance in 2002, the European currency is up more than 6% in 2003 so far. This compares favorably with the Nasdaq Composite in 2003 and handily beats the performance of the large-cap stocks of the Dow Industrials and S&P 500.

But the question for those who have not participated in the euro's bull market is plain: how long will the euro's advances continue? Looking at the current technical position of the euro, the most obvious answer may be: not much more.

Will resistance at the top of this diamond consolidation force a reversal in the euro's upward trend?
Graphic provided by: TradeStation.
 
Why so? The euro has formed a diamond consolidation--roughly between the second half of January 2003 and the first half of April. This consolidation finds support at 1.0465 (the March lows) and resistance at approximately 1.1042 (the March highs). It is this resistance that is currently being tested by a breakout to the upside.

One of the things I've learned most recently from the diamond consolidation in cotton futures I wrote about a few weeks ago (see "July Cotton's Diamond," Traders.com Advantage, April 11, 2003) is that diamond tops do not always breakout on the downside of their formation. On some occassions, diamond tops do in fact breakout on the topside of their formation (as was the case with July cotton and is currently the case with the euro), only to find resistance at the top of the formation. The reversal after meeting such topside resistance can be swift--again, July cotton futures provide the most recent example of such a phenomenon.

Thus, there is an argument that diamond consolidation should not be immediately traded based on their breakout from the formation. Instead, there may be prudence in waiting to see how any breakout reacts to resistance or support provided at the top or bottom of the diamond consolidation. While this may seem to cause traders to miss a significant amount of the ensuing price move, there is an important aspect of diamond consolidation resistance and/or support to keep in mind. Writing in his modern-day classic, Encyclopedia of Chart Patterns, technical analyst Thomas Bulkowski notes that the resistance or support from diamond consolidations is often especially long-lasting. This suggests that there may be ample intermediate to long-term rewards for those patient enough to allow prices to fail at resistance or support.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Date: 04/30/03Rank: 2Comment: Andrew s Pitchford would have given you the answer quicker
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