Sunday, March 3, 2013

Euro Chart Remains Bullish

The euro is forming what looks to be a fairly huge bullish inverse head-and-shoulders formation.

Granted, it's not a perfect H&S pattern given the tilted neckline, but valid H&S formations do not always have to be perfect. The neckline was breached late last year and has since undergone a very-common pullback to the neckline. Such a pullback or retrace is often followed by a resumption of the prior trend, in this case being up.

The neckline provides support at about the 129 level. In addition, the 200-day moving average (MA) serves as further support at 128. It's also worth pointing out the bullish "Golden Cross" that occurred last year in late October and remains intact.

RSI and stochastic indicators reflect oversold levels for the euro, inferring selling has been overdone. A rally should soon ensue.

With the euro chart appearing quite bullish to me, overall it further suggests that one should continue to be in "risk-on" mode. Although I have been expecting an overdue market correction with the S&P 500 retreating to the 1460-1480 level, such a retrenchment would be a healthy pullback within an existing uptrend. Given the significant momentum occurring during the YTD market advance to February 19, it would be rare for the market to top out at this point. Typically this kind of built-up momentum serves as forceful thrust that works to carry the market higher after an initial correction. We may eventually get a final peak in the market -- just not yet.

Regarding a rising euro equating to risk-on mode, over the last several years the euro has been positively correlated with equity markets.


The above shows the rolling 100-day correlations for the euro vs. the S&P 500 and MSCI World Index (ex USA), respectively. You can clearly see a positive relationship as correlations rarely dip below zero. As long as the euro maintains a bullish outlook, it should be a tailwind for equities.

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