Has the euro topped out in the market?

The euro made a top just before the Christmas break, and since then the single currency has fallen hard. John C Burford explains why.

Since the start of the New Year, many markets seem to have changed direction. This is especially true for the dollar. What could have happened to induce these totally unexpected changes?

As they say, nobody rings a bell at the top. So what is it that causes a major market such as the dollar to change direction?

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

During big rallies, such as we have seen in the EUR/USD, there was no shortage of reasons offered by pundits for the bull move. Last year, we were told that the eurozone sovereign debt crisis had passed. Bond yields of the debt of Spain, Greece and other problem' countries were falling and were reaching safe' levels.

At the same time, spreads over the German bonds reached very low levels. The euro was seen as a solid bet again. Confidence had returned.

Advertisement
Advertisement - Article continues below

But just before the holiday break, the EUR/USD made a top and has fallen sharply since then. This was my chart from last time I covered the euro on 20 December:

13-12-20-MWT-2

But the market had not finished its rally and it made one more final push up. Here is the chart updated to this morning:

14-1-6-MWT-2

The rally pushed past the critical 1.38 level, but was met with heavy selling. This produced the key reversal in the Dollar Index, which I showed last time. The euro is the largest component in the Dollar Index, which is made up of a basket of currencies. They trade very much in anti-sync.

Why the euro fell

The fact is that markets are moved by changes in aggregate sentiment of the traders. This is an unseen effect that only manifests as a change in direction of the market. Major market turns are made when the majority least expect it.

But even with the sharp decline off last year's high, my lower wedge line on the daily chart has not been broken and the major trend remains up. But the market is getting very close to the line. And if it breaks, that should confirm the trend was now firmly down.

What information can the hourly chart divulge?

14-1-6-MWT-3

I have called the 1.39 high as a blow-off top. This is where the market made a desperate lunge into a new high as it took out the multitude of protective buy-stops placed above the 1.38 level. This level was widely watched by many traders.

Advertisement
Advertisement - Article continues below

The buying then became exhausted as some longs decided to take profits and new shorts emerged to reverse the market. This occurred outside of any fundamental' news development.

There was a major shorting opportunity when the market broke below the wave 1 low.

The basic rule of trading

Elliott wave

positive-momentum divergence

And when this wave 4 completes, we should see a fifth wave down. That could perhaps take it below my lower wedge line. That will be my roadmap. If the market veers off this road, I shall be amending it accordingly.

Remember the basic approach to trading is this: let the market speak to you, and make sure you listen!

Advertisement

Recommended

Visit/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

Visit/investments/property/house-prices/600840/the-biggest-risk-facing-the-uk-housing-market-right-now
House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
Visit/economy/uk-economy/600824/how-the-bbc-can-survive-the-end-of-the-tv-licence
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
Visit/economy/600838/money-minute-monday-17-february-good-news-ahead-for-the-uk-economy
Economy

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020
Visit/investments/stockmarkets/european-stockmarkets/600725/is-2020-the-year-for-european-small-cap
Sponsored

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019