The Euro's Head and Shoulders Top

11/05/01 02:48:31 PM

by David Penn

The most recent rally in the common currency has stalled short of the August and September highs.

Security: ECZ01
Position: N/A

With all the talk about whether the United States economy is or is not in recession, less attention has been paid to Europe's attempt to stave off similar economic woes. So far, Europe has managed to avoid the earnings shortfalls that have plagued American companies and, as a consequence, the European Central Bank (ECB) has resisted the interest-rate cuts that have become as regular as rain in the U.S. But as rumors mount that the ECB is increasingly considering rate cuts, the euro itself has already started to show signs of weakness.

The December euro had been on a major advance beginning over the summer when the currency bottomed at .8360. Over the next three months, as the U.S. stock market fell 24%, the euro rallied 11% to a mid-September peak of .9305. This ride was not without its correction. After reaching .9212 in mid-August, the December euro corrected 4% before resuming its advance to the September peak.

Continued declines in the December euro could mean a successful breakdown for this head and shoulders top.

Graphic provided by: TradeStation.

After reaching a high of .9305 in September, the December euro again corrected approximately 4-5% to .8850 by mid-October. While this correction allowed the common currency to put in a higher low, leaving open the possibility of maintaining the uptrend, the rally that has followed this correction has been decidedly weak. Bulls have not been able to hold opening prices during most of the rally--to say nothing of advancing--and the rally appears to have petered out at the end of October with a high of .9114.

The correction from this most recent rally is what makes a head and shoulders top possible in the December euro. Beginning in August, with peaks in August (.9212), September (.9305), and late October (.9114), this head and shoulders top would require prices to continue to deteriorate, dropping beneath the correction lows of October (.8850) and August (.8828), in order to have a successful breakdown.

The downside potential from a successful breakdown in the December euro could be significant. With a peak at .9305 and a correction low point of approximately .8833, a downside target of .8361 would send the December euro, effectively, back to where the whole rally started back in July. There is, however, some limited support in the form of the late July congestion between .8828 and .8699, and congestion in the diamond bottom (June/July) that initiated the rally may act to slow the euro from reaching any ultimate price target.

David Penn

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

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HEAD & SHOULDERS

The Euro's Head and Shoulders Top

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