Trading a true currency collapse is a rare opportunity. Most market participants are familiar with the story of George Soros and his ride to prominence on the back of the collapse of the British Pound. Is it possible that a similar opportunity may present itself soon in the form of a collapse of the Euro? The analysis contained within this report tends to indicate that it is possible.
This is a technical analysis report with only tangential reference to macro fundamental factors such as economic growth, quantitative easing and interest rates. Sound technical analysis tends to reveal the potential in a market long before fundamental factors coalesce, though in this particular case the gap between market action and fundamental news may be narrow. In a collapse scenario, the edge provided by technical analysis can determine whether a trader is properly positioned at the right time or left watching on the fringes of the trade.
In this report I'll be covering:
- Euro Dollar
- Euro Yen
- EUR AUD
- EUR NZD
- EUR CAD
- EUR CHF
- EUR GBP
- EUR SGD
- Gold/Euro
- Silver/Euro
- Interbank credit spreads
- European Financial Stocks
Euro Dollar
This monthly chart will be used as our primary view for tracking this market and its potential trading setups:
The setup is potentially for a major C wave breakdown and collapse from a long term weekly head and shoulders formation following an intermediate term corrective wave into resistance. This is a potential trade that has been in the process of development for over 8 years.
The neckline of the formation can be drawn as two parallel (red and black) potential necklines, creating a zone of support. The formation can then be viewed as a large single head flanked by sets of three left and right shoulders or a double head flanked by sets of double shoulders. I'd probably favor the more conservative second option, particularly given the multiple penetrations of the red neckline. The neckline zone also closely tracks the 200 month exponential moving average.
A conservative, initial target for the move following the current upwards correction to approximately 1.35 is .94 for a 30% decline. This may be only a first stop, however, in a much more severe collapse scenario. As we will see, the overall technical picture tends to question the continued existence of the European Monetary Union currency unit.
Let's look at the setup in more detail:
In this scenario, the 2008 decline is a Major A wave and all action since then is a B wave triangle. The final E of B move is currently under way and it also creates the third right shoulder along the red neckline. The E wave appears to be targeting the confluence of the 200 and 50 week EMAs, which have turned down and have crossed bearishly, as well as the midpoint congestion of the triangle and the 50% retracement of the D wave.
As you can see, EuroDollar is potentially set up for a crash sometime in late 1st quarter to early 2nd quarter 2012. Note that there isn't really anything in this scenario that prevents EuroDollar from visiting the red or black upper rails, so the trade may yet be on the long side of the market for quite some time. The E wave top could come much later in 2012.
Is there a bullish view of this chart?
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