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Coming intolast week we said,“It’s quite possible we are in for a tug of war this coming week between bottom and top side levels before making a clean directional move. The reaction to the FOMC meeting on Wednesday may dictate which way the euro heads for the foreseeable future.”That was indeed the case for the week in terms of ‘tug-of-war’ as both top and bottom-side levels proved even further to be formidable to both sides of the market. The reaction to a directly hawkish Fed came just as the euro had been edging higher along the underside of a trend-line on the 4-hr chart. The sharp move lower quickly found support on the April trend-line where a bounce ensued on the two days to conclude the week where the euro ended up closing unchanged Friday.
Something has to give at this point – either a strong breakout to the top-side or a clean slice through the April trend-line. Then we can likely expect momentum to pick up. It won’t be long before top and bottom-side thresholds intersect, and with a few more sessions of the same ole back-and-forth trading that will be the case. A ‘head-and-shoulders’ (H&S) formation is still in the works with the lower close on Friday. If we continue to jostle around it would be a welcomed event as pressure would be pent up into a wedge formation, leading to a potentially explosive move. The trend suggests a break higher, but with these type of funneling situations it is wise to wait for a break. A breakout above the 9/8 swing-high at 12092 will bring into focus the June 2010 monthly closing print at 12236, while an April trend-line break will quickly find 11825 to contend with (H&S neckline, a break below will confirm pattern), but not likely hold given the growing importance of the trend-line. On the downside in the event of a break, the area between 11700/11600 will come into focus as support.
EURUSD: Daily
4-hr
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In Friday’s webinar, we looked at the US Dollar Index (~57% is the euro) and noted the possibility of a bullish price sequence developing should we soon see a hold and development of a higher-low on the 4-hr. This could put DXY in position to carve out an ascending wedge, and given the fact we are at a major area of support a top-side breakout would appear the likely outcome. More time for this to come to pass, but this coming week we should know one way or another whether it’s a scenario worth keeping on the board.
US Dollar Index (DXY): Daily
4-hr
---Written by Paul Robinson, Market Analyst
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