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20 year chart

On a 20 year time frame, the Euro relative to the USD is, by definition, a bear flag.

It has broken through both the 50% and 61.8% retracements of the up move, which took 8 years to make, from 2000-2008.

EUR-USD 20 yr chart 7-30-16

We can clearly see that the auction is being supported by the historical consolidation of the 1997-99 range.

The natural course of action would be for price to test lower.  And if we were short on a large time frame, we can clearly see the targets below, where there was historical consolidation, between 1999 and 2002.

5 year chart

If we’ve decided that the larger time frame move is likely down, before we speculate about what fundamental conditions might cause the move, let’s zoom in, and consider how this move might take place, and how to set up a trade.

The bear flag (like all flags, and consolidations) is a smaller time frame range.

EUR-USD 5 yr chart 7-30-16

Since I’ve concluded that the current initiative is down, I’ve re drawn the fib from the top.  So if price did happen to break out of this bear flag, to the upside, I’d look for resistance in the $122-126 area, and then a continuation down.

However, the more likely course would be to continue down directly out of the bear flag.  Which is a range from $105-115 ish.

It is currently climbing through this range (price is back above the middle of the range) and might well retest the $115 area again.  I would say that area is short-able, for first a retrace of this range, and potential follow through to the lower targets, $102 and beyond.

Macro fundamental causation

BTW, before we zoom in to analyze the anatomy of the bear flag, can anyone guess what caused the giant slide of the Euro valuation, or conversely seen, the strengthening of the dollar, in Oct 2014.  We really don’t even need to Google it, do we?  That was the month the US Fed stopped printing money (ended “quantitative easing.”)

The really amazing thing about this is that it was not caused by an action (such as the EU starting to print money, or even better, a strong EU economy causing a lot of money creation through healthy lending to businesses and individuals.)  It was caused by the ending of an action.

And the action that was ended was the artificial weakening of the US currency, through a money printing scheme on a mind bogglingly big, historically unprecedented scale.  And all it accomplished, in terms of currency valuation, was to keep level with the Euro, from 2008-2014.

And, btw, speaking of macro fundamentals, going back to the 20 year chart, note the action from 2001-2008.  A massive weakening of the dollar!  Huge!  And what caused that?  The cheap money, that fueled the housing boom of course.  Arguably that was more healthy than the post 2008 money creation scheme.  If they had unwound the cheap money, by raising rates, earlier, say, 2004, we might of avoided the 2008 crash.

Another thing this chart tells us, about what happened fundamentally, under the surface of money supply, the inflation/deflation currents that are commonly thought to be inscrutable: all the money created through the printing scheme, about $4.5 trillion, was only enough, to replace the money that blipped out of existence when housing loans defaulted.

And the fact that the dollar fell when the money creation stopped tells us that the defaults were still not over, even by 2014.  Money was still disappearing.  So the dollar got stronger.

Bear Flag anatomy

Back to technicals.  Inside the so far 18 month bear flag, we can see a series of micro ranges, with one big slide in the middle, in November of 2015.

EUR-USD 18 mo bear flag ranges 7-30-16

Let’s look later at what caused that big slide.  It certainly looked like that was the big break down, and it would move lower.  But something rescued it in December.

Anyway, we can see how initiative price is also responsive, in the sense that it’s being pulled back to a former area of value.

Over and over, the 80% rule triggers when price re-enters and retraces a former range.  Depending on our time frame, each of these can trigger trades.

The current trade looks to me long to $114-115, with the caveat that we are still neatly touching 50% of the down move.  However, the approach towards the level looks initiative, since it did not bauble on the way up.  And it broke above the range mid.

However, trading from the mid of a range is pretty risky.  Trading from the outside in, short from about $115 would be better.

Micro scales would be, 1. Back to mid of range, 2. Bottom of range, 3. Break-down from range, and continuation below, to lower targets depicted in macro charts.

Also, not failing to notice, the range is coiling, tightening.  Eventually price will spring suddenly up or down.  Most likely down.

More fundamentals

BTW, here is what precipitated the Euro slide in Oct of 2015.

https://www.theguardian.com/business/2015/oct/22/mario-draghi-ecb-prepared-to-cut-interest-rates-and-expand-qe

Draghi said he was prepared to increase QE, and further lower rates, deeper in to the sub zero zone.

Also, if we look earlier in the chart, at the first consolidation, in Feb-March of of 2015…that was the end of the slide caused by the US Fed ending QE.  Then in March, the EU started QE, causing the one last puke from $114 down to $104.

So that was a bear flag, and continuation.

The fact that price has lingered so long down in this $104-$118 range is what makes it look like a bear flag relative to the big slide in 2014.  If it was going to reverse up, it “should” have happened sooner.  So now, down is more likely than up.

Future fundamentals

What would cause the continuation down?

The US Fed has continued to posture that it will possibly or probably raise rates again in 2016.  Seems hard to believe, but if they do it, that could be a cause.

EU QE is supposed to end in the fall.  And if it really ended, it would probably cause a reaction up in the pair.  Most likely, it will be re-initiated.  That, and/or increasing it, could cause a further move down.

Someone who was following supposed European economic indicators could make a more educated guess about which course might be taken, and why.

The chart as a crystal ball says to me the EU is likely to print more money, and maybe delve further in to negative rates.

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