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AROON


Euro Index Breaks Flag Support

09/20/05 08:07:59 AM
by Arthur Hill

After a weak rally the last two months, the euro index broke flag support to signal a continuation of the larger downtrend.

Security:   $XEU
Position:   Sell

The decline from ~137 to ~119 established a downtrend with the support break in May (Figure 1). The index became oversold below 120 and a bounce was needed to relieve this oversold condition. Because the bigger trend is down, we should expect a bearish pattern to form on the oversold bounce. The rising flag is classic for corrective rallies within a larger downtrend. It represents a weak rally designed to alleviate the oversold condition and prepare for a continuation lower.

FIGURE 1: EURO INDEX. Even though the rising flag is a bearish pattern, confirmation is required before turning bearish again.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Even though the rising flag is a bearish pattern, confirmation is required before turning bearish again. As long as the flag rises, the bulls have the upper hand. For the rising flag on the euro index, a move below the lower trendline and mid-August low would break the advance and signal a continuation lower. The index broke the lower flag trendline and finished right near the August low. The rise has been broken and I would look for lower prices over the next few weeks.

The Aroon indicator confirms recent weakness. I am using 20 days or one month. Trending moves usually start with strong moves above 70. A strong downtrend was present from mid-May to mid-July as Aroon down (red) held above 70 for almost two months. It is hard to predict how long a trend will last, but I would consider the trend bearish as long as Aroon down remains above 70 and above Aroon up (green).



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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