Sunday, July 22, 2007

A Long Term Technical Look at the Euro

In this post I'm just going to go over quickly a monthly chart of the Euro Index. This chart should help you understand the big picture for the currency, and how it will affect other markets. I believe that the long term implications of the following chart are quite bullish, and I will explain why.

In the chart below, each candle represents an entire month of price action. This chart goes back about 12 years.

The main thing I wanted to point out, and I'm sure you can see it already, is the enormous inverted head and shoulders pattern that has formed. This is obviously a very bullish development, and, if the pattern is completed, it could have implications for the Euro, and indeed Gold for many years to come.

The second thing I noticed about this chart is the double top that formed. The Euro hit its old 1995 high as marked by the second blue arrow, and stalled out. At the exact same time, Gold Stocks, as represented by the XAU, topped out, and experienced weakness for the first half of 2005. For those who do not believe in intermarket analysis, this would just have to be another coincidence.

One other note of interest, and this is for candle chartists, is the shooting star candle formation that occured in October, 1998. This candle, which is related to the gravestone doji, is one of the most ominous formations, in my opinion.

The final aspect about this chart I'd like to show you is the MACD Histogram. This indicator, when used on monthly charts, tends to be very reliable, with very few false signals given. I view it is a giant pendulum slowly swinging back and forth, from bull to bear market. As you can see we have swung into bull market territory.

That's all for the Euro analysis, but before I go, I'd like to say that I would like to hear your thoughts and constructive criticism about this site. So, the first 5 people who send me an email, or write a comment, will receive a free technical analysis ebook via email. This ebook is one that I have read, and you will be able to read it on your computer in its entirety. Thanks again for stopping by.


gsm_73 said...

Hello Merkel:
I keep surfing the net looking for sites with technical analysis of gold and currencies.
Its been just two weeks since I started visiting the site. Found your reading accurate.
Wish you all the best and hope to keep reading your posts.


DC said...

Quick question: I'm not very fluent in technical analysis, so forgive my general ignorance, but in this post you point out the possible bullish pattern of the euro, but in a previous post, you mentioned the euro is overbought--wouldn't being overbought generally seem ominous for a bullish outlook?

DC said...

Oh and I forgot to mention something about your site: I have very much been liking it, I know little comparatively about trend analysis so this education is long overdue. I like the way you present your articles: brief, plain language, & focused on small bite-sized examples from which to learn things. Best of luck to you, DC

Danny Merkel said...

Hi DC,

You bring up a valid point about my analysis of the Euro, and I think its important I clear that up.

In the previous post I did indeed say that the Euro is overbought. But keep in mind that was in reference to a daily chart.

In my latest post, the chart is a monthly chart, and much longer term. The implications of the monthly chart will last for years, whereas the implications of the daily chart may only last a week or 2.

To use an analogy, imagine looking at a really short term chart, like a 5 minute chart, as like looking through a microscope, and seeing, as an example, bacteria moving about.

A daily chart could be compared to looking down from a tall buliding at people moving about on the streets.

A monthly chart could be compared to looking at the planets moving around in orbit.

Each are moving independantly from each other, but are also interconnected in a sense. And the longer the time frame, the more dominance it has.

Also, thanks for the comments. I will send you an ebook. I must say that I really enjoy your blog, especially your latest post on Warren Buffett. Furthermore, I believe your command of the English language is second to none.

DC said...

Thank you for the kind words; and I'm an American! As ironic as it it, we sometimes (as a people) tend to speak the language rather poorly (especially in times of late). Fortunately for me and my close colleagues, we're not all what we read in the papers. :)

But back to the Euro issue--I like your use of analogies here. So could we say that, although we're still talking about the same thing, the Euro, we can talk about in contrary ways much the same as how we might say someone is of generally good health, though they might have an ear infection? In other words, as far as the whole person is concerned, they eat well, & exercise, so we would expect perhaps a long life from that; however, when reviewing the ear infection, we could say that they're in quite a bit of pain & stress, and be equally both correct and consistent with our other statement?

Danny Merkel said...

gsm 73, and DC.

Thanks again for the comments. DC, I like your analogy. I think that's probably a better one than mine. You really hit the nail on the head there.

gsm_73 said...

Hello Danny:

Would you look at the weekly price chart for Gold on Stock Chart?
The appearance of doji was followed by lower gold price today. But Stochastics shows further room for price improvement.
Would you comment on that? Could we see 700 this time around?

Danny Merkel said...

gsm 73,

With weekly charts, I always wait until the week has been completed before I analyze the candle formations. You are right though, there is a doji at the moment.

I wouldn't put too much emphasis on the stochastics. It's only an indicator, and all indicators can only help a little bit.

Gold will certainly surpass the 700 mark eventually. However, as I said in my previous post, we are due for a bit of a correction first.