The bullish looking breakout above the hourly declining trend line and long term declining RSI trend line last night turned out to be a false one, and 1.3540 held and is now strong resistance. A break above 1.3540 would be very bullish at this point and we are looking to buy it. The pair fell back during the European session mainly due to a lack of confidence in European government measures to stem the credit crisis in the EU. Now near 1.3256 with oversold hourlies, which favor a rebound either at current levels, just above the 1.3256 low, or right after testing it.

Alternatively, we may see a sustained break of 1.3256, with 1.3050..70 coming in as next support area. Wave theory and Fibo projections then call for a low of 1.2650.

Action Plan: I had decided to give the long trade a chance to run toward its target of 1.3670 based on what looked like a sustainable uptrend, but had also raised the stop to just below the rising hourly trend line at 1.3400 before leaving it unattended overnight. This stop was hit overnight closing the trade at a 3 point loss. Watching price action very closely now to either go long on a bounce out of 1.3256, or short on a sustained break below 1.3256. Either scenario is equally possible at this point, but the bullish one is favored short term by the oversold hourly conditions.

Support: 1.3256 L-10-10    1.3065 DSpptRsst    1.2970 H-5-15-06

Resistance: 1.3345 L-10-16    1.3540 HSpptRsst    1.3687 H-10-15

RSI: Hrly: failed break above decl. TL, break below rising TL, o/s, Dly: supported by rising TL

Hourly Chart:

Went long near the up trend line and in anticipation of it holding. Tight stop at 1.3370, below the trend line. Target 1.3670.

We are at a critical point now where the low at 1.3256 (or a level very near it) is either going to be confirmed as a major daily bottom, or decisively broken which would leave the downside wide open. The dailies look slightly bullish at this point, with the daily RSI showing clear signs of fading selling pressure, but the strong daily down trend looms large and ominous on the chart and makes the Euros rebound attemps look rather feeble at this point. But divergence on the dailies cannot be ignored, and there is good pattern symmetry now on the daily chart between the 7/15 top and the 10/10 bottom. The top on 7/15 was a classic exhaustion move, followed by a failed attempt to push to new highs which then launched our current massive bear trend. The low at 1.3256 could turn into a similar exhaustion bottom. If 1.3345 holds and 1.3540 is broken, the bullish scenario would look quite strong. Medium and long term I definitely favor the long side for fundamental reasons. I believe that the dollars current strength is primarily caused by the liquidity crisis sweeping all financial markets, with forced hedge fund selling being the latest culprit. Once this is over, and buyers return to the stock and commodity markets, we should see strong bounces in gold, stocks, and the Euro.

But the short term outlook is pretty speculative at the moment, and there is no clear directionality at this point. I found it challenging to trade this pair lately, and will implement tight stops or wait for break or confirmation of key levels. If there is no large move at the opening in Asia, I will consider going long near 1.34 with a tight stop below the trendline and recent hourly lows at 1.3370 and a target of 1.3670. Low risk/return on this trade. A less aggressive trade would be long at 1.3550, but this would require a much wider stop since a return into the current range cannot be ruled out.

Alternatively, we may see a break below 1.3440, and a retest of 1.3256. In this case, look for a strong bounce at or slightly below 1.3256 leaving a double bottom on the charts with a confirmation of triple RSI divergence. Would definitely go long early in this bounce with a tight stop. If 1.3256 is decisively broken, I will go short on a failed rally near 1.3256 with a target of 1.2980. Low risk/return on this trade as well. Will not buy an immediate break of 1.3256 though due to a good chance of this sparking a major rebound.

Support: 1.3445 L-10-16    1.3256 L-10-10    1.2970 H-5-15-06

Resistance: 1.3458 Fibo38    1.3540 HSpptRsst    1.3687 H-10-15

RSI: Hourlies: supported by rising TL, capped by decl. TL, Dly: supported by rising TL, FS

Action Plan: Long near 1.34, stop at 1.3370, target 1.3870.

Hourly Chart:

Daily Chart:

Just exited the short trade at a 1.3477. A bullish triangle has formed on the hourlies, and the RSI is turning up. A break above 1.35 would confirm this. Still a potential for 1.3256 to be tested, but charts are looking increasingly bullish and I’d rather be out of this trade at a small loss, especially with London about to open which often brings upside for the Euro. Not wanting to carry the trade overnight is another reason for the exit.

The pair tried to bounce during the European session but fell back to 1.34 before closing. The declining RSI trendline held. Daily and hourly charts look bearish and a retest of 1.3256 is still possible. I continue to favor the downside in the short term but it is quite possible that 1.3256 will spawn a sharp rally and I’m looking to buy a bounce out of there. But joining the short side for now.

Alternatively, we may see upside momentum pick up from current levels and a break of resistance at 1.3535.

Action Plan: I had exited my long late last night at 1.3423 when upside momentum picked up again, which turned out to be a good move since my stop at 1.3530 would have gotten hit. In retrospect, this stop was set slightly too low and I had missed to take resistance at 1.3535 into account. Resetting the trade now since hourly momentum is fading again and price and RSI seem to be rolling over: Short at 1.3419, stop at 1.3550, target 1.3256. Will watch the trade closely and may exit if upside momentum persists. Potential for a rally still pretty high.

Support: 1.3256 L-10-10    1.2970 H-5-15-06    1.2870 WSpptRsst

Resistance: 1.3458 Fibo38    1.3535 HSpptRsst    1.3682 HRsst

RSI: capped by decl. TL, Dly: supported by rising TL

Hourly Chart:

Went short on the rebound after the clear break of 1.3458. Target is 1.3560, just a few points above the low at 1.3256.  Stop above the declining hourly TL, the hourly high at 1.3516, and the 50% Fibonacci retracement of the 1.3256-1.3784 range. Hourlies near oversold, but downside momentum is strong and accelerating, and 1.3458 should form strong resistance.

Hourly Chart:

Still no confirmation of a new uptrend on the dailies and 1.3780 remains strong resistance. On the hourlies, the pair just broke its up TL support and the RSI is rolling over. Further downside is expected intraday. 1.3456 is first major support. EURUSD seems to be consolidating at this point, and this could set the stage for further upside medium term. There is a risk that 1.3256 is restested again. The US stock markets are falling again, putting pressure on the Euro as well. My medium term outlook is bullish, but I expect short term downside.

Alternatively, we could see further sideways consolidation, with a bounce ahead of 1.3456, possibly around 1.3520. The longer the pair holds above 1.3456, the greater the likelyhood of further upside at this point.

Action Plan: Not enough r/r for a short trade since 1.3456 is near by. Waiting for a test of 1.3456, and plan on buying bounce out of there with a tight stop below that level. Plan on going short on a clear break of 1.3456 with 1.3260 the target.

Support: 1.3520 Fibo50    1.3458 Fibo38    1.3256 L-10-10

Resistance: 1.3682 HRsst    1.3784 H-10-9    1.3907 H-10-3

RSI: Hrly: Capped by decl, TL, broke below rising TL, Dly: Supported by rising TL

Hourly Chart:

EURUSD rebounded sharply overnight after synchronized government action to bolster the global financial system was announced this weekend. Key reistance of 1.36 was broken and paints a bullish short term picture for the pair. Hourlies are currently rolling over and divergence is starting to show up on the RSI chart. RSI is midlevel, and price has broken back below hourly resistance at 1.3565. Prefer to wait for a dip towards to 1.3458 before joining the long side. This level is very strong support and there is a good chance it will be tested again. A break of 1.3784 following this dip would signal that a bottom at 1.3256 is in place and suggest a new daily uptrend is underway (higher highs and higher lows.)

Alternatively, we may see a break below 1.3458, and a return to 1.3256.

Action Plan: Buy a bounce out of 1.3458.

Support: 1.3520 Fibo50    1.3458 Fibo38    1.3256 L-10-10

Resistance: 1.3682 HRsst    1.3784 H-10-9    1.3907 H-10-3

RSI: Hrly: Rolling over, Dly: Supported by rising TL, FS

Hourly Chart:

Wow. What a week. Let’s step back and take a look at the long, medium, and short term outlook for the Euro/Dollar pair.

Long Term Outlook

The dollar benefited from the collapsing markets last week and drove the Euro to new lows. EURUSD broke through major support at 1.3319 (38.2% Fibo of the daily range), but managed to close above it. The weekly long term trendline is now clearly broken and the weekly charts look quite bearish. Euro bulls can still cling to Fibo38 support, however.

Despite the bearish technicals, my long term outlook is still bullish, mostly anchored in fundamentals. First, I believe that the main reason for recent dollar strength is the deleveraging of the markets in times of highly restricted liquidity. This has led to the crash this week as market players scrambled to meet margin calls and to fund other obligations. I don’t think it is so much that the dollar is perceived as safe haven, that’s probably true only to some extend.

Second, there is the bailout and the prospect for rapidly accelerating inflation. I think it’s too early to use the word “hyper inflation”, but we could very well see that happening. Europe has its own problems and is adopting now national bailout plans as well, but the exposure to US mortgage derivatives is still smaller compared to US banks. This inflation scenario should be in favor of the Euro in the medium and long term, as well as gold and commodities. We are now in a very short period of deflation, that is likely followed by high inflation.

And finally there is the interest rate differential. Once the dust of the crash has settled a bit, we should see traders make more rational decisions based on fundamentals again, and this should be in support of the Euro.

My big-picture long-term outlook at this point: I am bearish on the dollar and US general stocks (Dow, S&P, NASDAQ), and bullish on the Euro, gold, gold stocks, and oil. We are in a commodities bull market that started in 2001 and is likely going to continue for another 5 years at least.

Medium Term Outlook

Today, several European governments announced emergency measures to protect banks and depositors. This will likely the be perceived positively by the stock markets, and should also lift the Euro. The daily RSI chart shows now signs of a decreasing downside momentum, and is in oversold territory. The daily decline form the all time high at 1.6036 down to 1.3256 looks complete and has the characteristics of a typical bear leg. It started with a breakdown through support at 1.5383 and a sharp down move to 1.4646 that covers 50% of the entire leg (Fibo50).  This is followed by a measured decline (here to 1.3881), and the first strong corrective upleg (1.3881 to 1.4865) where the early bulls are getting hopeful. The bear leg is completed by a capitulation move to new lows, which I originally thought was 1.3442, but may now end up being 1.3256, or even lower if the stock markets continue their decline next week. But strong support at 1.3319 should limit further down side in the short term and is in favor of a rebound.

The bear leg chart pattern I just described can be observed in hourly charts as well, and is rooted in the psychology of market participants (greed/hope and fear). It applies to bull legs in reverse as well. A bull leg often starts with an accelerating exponential move, a brief pull back, a measured upmove, a deep correction, and is completed by an exponential blow-off phase.

Short Term Outlook

The short term is difficult to predict at this point, but I favor further upside for the Euro based on the joint statements by the G7 nations to calm the financial markets. Very strong rebound of 200 points after hitting support at 1.3256 initially failed at 1.3458, which is good hourly resistance and the 38.2% Fibo retracement of the last hourly range. I expect the rebound to continue to at least Fibo50 at 1.3520. Next major resistance is the 1.3580..1.3610 area, and a break above would call for further upside to 1.38.

Alternatively, we could see an extension of the down move likely coupled with high volatility. Next major support is coming in at 1.2870, and we have to go back to Jan. ‘07 to find it.

Action Plan: I missed my chance to exit the long trade on the rebound after the channel breakout, and took a full stop loss of 132 points. Sidelined until a clear bottom pattern emerges. Risk/return too low for a short trade.

Support: 1.3256 L-10-10    1.2970 H-5-15-06    1.2870 WSpptRsst

Resistance: 1.3458 Fibo38 L-10-6    1.3520 Fibo50, HSpptRsst    1.36 HSpptRsst

RSI: Hrly: Capped by decl. TL, recovering from oversold, Dly: Supported by rising TL, potential FS

Hourly Chart:

It has been quite the roller coaster for gold stocks this past week. On Wednesday, Oct. 8, we declared the bottom based on very strong technical indicators (triple RSI divergence, a tested and confirmed kangaroo tail, and a very strong up day of 14%). The next day, GDX consolidated slightly ahead of resistance at 33, a normal and expected behavior. But then on Friday, it fell victim to a major liquidity crunch when institutional investors suffered margin calls and needed to raise cash fast, and they took it from liquidating stocks across the board, including their newly taken safe haven positions in gold and gold stocks. As a result, GDX lost all its gains, touched 25 for a second time, and closed near the low at 26.34. It did not violate the triple RSI divergence yet (now there’s a potential for a quadruple divergence), but our kangaroo tail may now be replaced by a double bottom if support at 25 holds.

In times when new lows or highs are made, it is always a good idea to look at the long term charts. And compared to the Dow Jones, S&P500, and NASDAQ, the gold stock sector’s long term technical picture is still bullish:

Here we’re looking at a chart of the HUI, the AMEX Gold Bugs Index, which is almost equivalent to GDX, but GDX is a tradable index, while the HUI is not. GDX was only launched in 2006, and we don’t have data going back far enough to determine the long term outlook.

Looking at the HUI chart above, we see that we’ve hit a major long term support trend line, and actually slightly pierced it. There is not a clear break of that trend line yet, and we have to take the extremely high volatility last week into account as well. Extreme fear or greed often cause technical levels to be briefly violated, and that often marks the final top or bottom. I believe we are at such a point now.

As long as this support line is not decisively broken, the gold stock sector’s up trend is still intact. If current support holds this may be one of the best times to go long. Time cycle theory is also in our favor here. We’ve  just completed the second wave in this multi-year bull market of gold and gold stocks. It happens to be almost exactly as long as the first wave that started back in November 2001 and ended in May 2005. Take a look at the similarity of those two waves. Both start with an exponentially accelerating strong upleg to the upper trend line (1), followed by a period of sideways consolidation (2). That is followed by a second upleg ending again at the upper trend line (3) and a final corrective move down to the lower trend line (4). In Wave II, the consolidation phase 2 took much longer than in Wave I, which caused the corrective wave 4 to be shortened and appear a lot more dramatic than in Wave I. But seen within the bullish channel or wedge that is formed by the two trendlines, the two waves are very comparable. Another significant fact is that the highs of Wave I form the bottom of Wave II, which is the 250 level on the HUI chart (25 for GDX).

If these relationships hold, and traders remember gold and gold stocks as safe haven investment again, we may very well see upleg 1 of Wave III starting next week. It would be a powerful and fast swing up towards new highs, hitting the upper trendline in 6 months to a year from now, depending on how fast the first upleg unfolds. This would correspond to HUI levels of 580 to 610 (or about 58 to 61 for GDX). Buying GDX today and riding this next upleg could yield gains of 140%.

Fundamentals for gold continue to be bullish, and the long term technical picture confirms this as well. As soon as the high levels of fear and panic in the general markets subside, traders will return to gold and gold stocks as safe haven investments. We’ve seen an early indication of that on October 8.