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Saturday May 22, 2010 - 02:43:18 GMT
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Euro Reverses Week to Up; Charts indicate More Upside to Follow

The Euro finished the week higher, but more importantly posted a closing price reversal bottom on the weekly chart. This pattern suggests that this week’s short-covering rally could be far powerful than previously estimated.

The short-covering rally which began on Wednesday continued in the Euro on Friday ahead of Germany’s vote to approve the massive deal to save the common currency and keep in check the Euro Zone debt crisis.

Technically, the current daily closing price reversal pattern usually triggers a 2 to 3 day rally. This part was confirmed by the three day rally, however, the upside target is usually a 50% to 61.8% retracement of the last leg down. Based on the last range of 1.3342 to 1.2143, the retracement zone is pegged at 1.2742 to 1.2884.

Because the Euro also made a closing price reversal on the weekly chart, another upside target has been established. The weekly main range is 1.3691 to 1.2143. The weekly retracement zone targets 1.2917 to 1.3100 as the potential upside target.

The best conclusion is that the combination of the daily/weekly closing price reversals indicates that something more powerful than just a simple short-covering rally may be taking place. Be prepared for more upside action next week as shorts will continue to cover aggressively until the Euro reaches the key retracement zones.

Fundamentally, German lawmakers approved the recently proposed $1 trillion loan package which should be accepted by investors as a show of solidarity and a solid attempt to heal public finances. If Germany is going to play a major role in the political and economic unification of the Euro Zone, the approval of this historic aid package is most important amid the recent weakness in the Euro currency.

After this week’s decision by Germany to curb naked short selling triggered a wave of negative publicity, Friday’s approval of the financial aid package by Europe’s biggest economy was a strong sign that it is genuinely concerned about bringing the Euro Zone nation’s together while showing its support for the Euro.

With a record amount of shorts in the Euro, the market got crowded leading to the current two-day short squeeze rally. The threat of an intervention by the European Central Bank also helped lead to jitters in the marketplace. Even if the ECB does not intervene, the mere threat of the intervention makes investors wary of holding too many short positions. With the main trend down, look for short traders to take advantage of the quick rise and begin to slow down upside momentum by slowly reentering the market on the short side.

Revived risk appetite drove the Australian, New Zealand and Canadian Dollars higher on Friday, but these markets were unable to push higher for the week. The main catalysts behind the rally were the stronger Euro and U.S. equity markets. Minor triggers were the threat of intervention and the unwinding of bearish spreads.

The Aussie closed up for the first time in six days but the main trend remains down. Over the losing streak, the Australian Dollar dropped from .8961 on May 13th to today’s low at .8070. Friday’s break took the Aussie to its lowest level since the week-ending July 24, 2009. The lower-low, higher close formation suggests the start of a possible 2 to 3 day rally with .8728 the next upside objective.

Greater demand for higher risk assets and oversold conditions also helped to boost the NZD USD. Although this market was not in a position to form a daily closing price reversal, watch for the start of a 2 to 3 day rally with a possible retracement to .6981.

The USD CAD slammed into resistance slightly above the old top at 1.0738, reaching a high of 1.0749 before turning south. Overbought conditions and a strong equity market helped trigger Friday’s profit-taking break. The formation of a daily closing price reversal top suggests the start of a 2 to 3 day break with 1.0430 the first objective followed by 1.0354.

 

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