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Chart In Focus

Euro Is Ripe For An Upturn

Chart In Focus
January 02, 2015

The slide in the value of the euro currency in 2014 was epic, and it makes me leery about wanting to catch a falling knife.  But there are 3 big clues that an upturn for the value of the euro is coming.  How much of an upturn is not indicated, but it should at least be a noticeable upturn in the charts.

Item #1 is the Commitment of Traders (COT) Report.  It shows that commercial traders of euro currency futures contracts are now net long to the largest degree since July 2012.  The commercial traders are the big money, and thus presumably the smart money, but they are often early in getting to an extremely skewed position like this.  They have been net long to varying degrees for the past 8 months and it has not mattered yet.  But the potential energy is there.

Item #2 is that the beginning of a new calendar year usually sees some kind of reversal of the existing trend in the euro.  What kind of reversal it is depends on what the trend direction is.  The Feb. 1, 2013 top was a much later than normal manifestation of this behavior; usually the reversal is closer to New Year’s Day. 

Item #3 is that gold prices are suggesting that an upturn is coming for the euro.  This next chart compares the spot price of gold in dollars to the euro currency.

euro versus gold prices

Normally the two plots move in close correlation, but not always.  Gold is now making higher lows while the euro is making lower lows, and history shows that when the two disagree, it is usually the price of gold that ends up being right about where both are headed. 

I am continuing to watch the euro price of gold, first shown in the Sep. 11, 2014 Chart In Focus.  It continues to show a basing pattern, and stubbornly refuses thus far to break out above the €1000 level, despite the decrease in the value of the euro.  I still believe that once gold priced in euros can break through 1000, that traders around the world will recognize that and pile in.

As for what news story or fundamental force might cause the euro to turn up in January, I am terrible at guessing such things.  But the reactions to the news are easier to model in advance when we have the right tools.

Tom McClellan
Editor, The McClellan Market Report

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