The day June 5th was a very important day for Europe (NYSEARCA:FEZ).
That was the day Mario Draghi pulled out all the stops and started to backup his words that he would do “whatever it takes” to prevent the Euro from continued strengthening.
During the June 5 ECB meeting Draghi lowered the deposit rate facility to an unprecedented (-0.10%), revealed a package of targeted LTROs (longer term refinancing operations to banks) to the tune of 400 billion Euros, and is preparing for asset backed security purchases and the Eurozone’s version of QE.
Usually such jawboning and wordsmithing would set off the contrarian side of my brain, just as it did temporarily as the Euro (NYSEARCA:FXE) traders took the Euro stronger on the news (as opposed to weakening as Draghi wanted).
However, this time I think Draghi will ultimately be proven correct, the long-term trend in the Euro (CCY:EURUSD=X) will resume its course, and the Euro’s two year strengthening ended in May.
It looks like all downside on the Euro (NYSEARCA:EUO) from here on out.
The Euro’s Trend has Actually Been Down for Years
Take a look at the following chart that displays the Euro’s history. Its weakest point was shortly after its non-physical virtual formation, in 2000 when it traded in the $0.8000s. It strengthened significantly into 2008, but since then has actually been declining, making lower highs and lower lows.
This first chart shows the Euro has been in a weakening trend since 2008 when the prevailing trend turned down. The Euro was as high as 1.6000 in 2008 and fell to as low as 1.2000 in 2010 and 2011. Today it trades around $1.3500.
Now check out the next chart, which I provided to our subscribers in early June showing why further weakness in the Euro would be very bad technically for the Euro. I also included this in a previous article I wrote on the Euro’s top found on our homepage, ‘Did Draghi just put the Dagger in the Euro Rally?‘
From the 2012 low, all the Euro had done is bounced into typical counter-trend resistance levels as it once again bumped into a key trendline. It then struggled multiple times to exceed $1.4000. $1.4000 has since never been exceeded and the trendline and retracement levels show the Euro’s bounce since 2012 was just a normal counter-trend correction into resistance.
In addition price formed a key trendline from the 21012 low that would help show when momentum warned of a trend change on the Euro. Price tested this upside momentum line during Draghi’s June 5 ECB (NYSEARCA:VGK) meeting shown on the next chart by the green trendline.
From there the chart reveals it best, that trendline remained support into July as the Euro held its upward momentum, but a breakdown of it and the Draghi low ultimately proved the Euro’s momentum had turned, it was now making lower highs and lower lows, and the Euro (NYSEARCA:DRR) had resumed its longer term downtrend.
Now check out the final chart showing why the Draghi low and why the price action surrounding it was so important. The Euro fell below that Draghi low definitively at $1.3503 ($133.50 on FXE) early Tuesday morning, July 22.
The Draghi low formed a very bullish short term candle formation on June 5 that ultimately failed. That day aligned a key inflection point between time and price, setting up a great opportunity for bulls to continue the Euro’s (NYSEARCA:ULE) rally.
Euro buyers did not step up to the plate as they only managed to take price above the Draghi levels for two days in late June as price ultimately fell through that important day’s price level this week.
This doesn’t mean there won’t be short term bounces, but when they do occur, the Draghi price levels will likely act as resistance as the bulls had their chance with the wind to their back, but could not succeed. The long term trendlines shown in the charts above also should act as formidable resistance to the rallies, just as they did throughout 2014.
The Euro’s rally is over, and the charts suggest the longer term trend in the Euro has once again turned lower with sizable downside potential.
The ETF Profit Strategy Newsletter combines fundamentals, technicals, and prevailing sentiment to form an actionable opinion on the markets. Subscribers have already received trade alerts to take advantage of a declining Europe. We also have stops located and will be following the Euro’s weakness in our twice weekly published Technical Forecast.