(EU) Pare Bearish Euro Stance Near Multi-Year Range-Base

Technicals
July 27, 2012; 7:10am

While yesterday's pop in the Euro above last week's 1.2324 high detailed in the 240-min chart below indicates strength on only the smallest of technical scales and is grossly insufficient to threaten any long-term bearish counts, longer-term traders are nonetheless advised to pare bearish policy and exposure to a more conservative level due to a confluence of technical factors that warn of a base/reversal threat and while Tue's 1.2042 low remains intact as support and a short-term risk parameter.

The technical factors that threaten the risk/reward merits of a bearish policy that we have advised for most of the past year include:

• the market's proximity to the extreme lower recesses of the past four years' range shown in the monthly log scale chart above
• the prospect that this year's decline from a 1.3449 high weekly close in late-Feb is the completing 5^th-Wave of a sequence from Apr'11's 1.4807 high
• the fact that this prospective 5^th-wave has thus far spanned a length within 1% of the (1.2219) 0.618 progression of Apr'11 - Jan'12's 1.4807 - 1.2679 decline amidst
• the lowest Bullish Consensus (www.marketvane.net) reading (24%) in 11 years and a level of historic pessimism that's typical of major base/reversal environments.

This is an impressive list of technical threats to the clear and present downtrend with only one thing remaining for these to warrant a policy change to the bull side- THE EURO'S GOTTA STOP GOING DOWN. For until or unless this market confirms a bullish divergence in momentum of a scale sufficient to break the major but simple downtrend pattern of lower lows and lower highs, none of these "threats" to the bear matter.

Indeed, the bullish divergence in momentum in daily momentum shown in the daily log chart below is another bullish factor that contributes to a base/reversal threat that could be major in scope. But only a glance at this chart is needed to see that, relative to the magnitude of this year's major bear trend, this week's pop is grossly insufficient thus far to be considered as anything but another corrective hiccup within the major slide. Even after this divergence, the market remains below a month's worth of former support-turned-resistance from the 1.23-handle and well below 20-Jun's 1.2707 next larger-degree corrective high this market really needs to recoup to expose a Euro reversal of more Olympic proportions.

These issues considered, shorter-term traders with tighter risk profiles have been advised to move to a neutral/sideline policy as a result of yesterday's poke above our short-term risk parameter of 1.2324. Weakness below Tue's rejected/defined 1.2042 low and new short-term risk parameter is required to negate this call and resurrect a bearish policy. And while this week's recovery is grossly insufficient to suggest anything but a slightly larger-degree correction within the long-term downtrend, the technical factors listed above that warn of a broader base/reversal threat warrant paring bearish exposure to a more conservative level for longer-term players. Strength above at least the 1.23-handle and certainly 20-Jun's 1.2707 corrective high are required to warrant further paring or reversal of a long-term bearish policy. Needless to say, a break below Tue's 1.2042 low will mitigate this immediate threat, reinstate the major bear, and expose potentially significant losses thereafter, including a run at Jun'10's major 1.1876 low.

As the Euro is the largest component of the USD Index, it is no surprise that technical condition of the USD Index is virtually identical to that just detailed above for the Euro, only inverted. Yesterday's relapse confirmed a bearish divergence in daily momentum that defines Tue's 84.01 high close as one of developing importance and the end to at least a 5-wave Elliott sequence from 19-Jun's 81.39 low. But the wave counts labeled in the daily log close-only chart above suggest that Tue's high could have also completed a major 5-wave sequence from 28-Feb's 78.25 low.

Amidst historically extreme bullish sentiment shown in the weekly log close-only chart below and arguably waning upside momentum on this major scale, it's not hard to cobble together a peak/reversal threat that could be major in scale, This said however, against such a long-term bullish backdrop, it is premature to conclude anything but an interim correction lower and that Tue's 84.01 high is a short-term but very important technical level and condition from which non-bullish decisions like long-covers and cautious bearish punts can be objectively based.

In sum, traders are advised to move to a neutral/sideline position as a result of yesterday's failure below last week's 82.73 intra-day low and in order to circumvent the depths unknown of a larger-degree correction or reversal lower. Strength above Tue's 84.10 intra-day high is required to negate this call, reinstate the major advance and warrant returning to a bullish policy.

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