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“At any given moment there is an orthodoxy, a body of ideas of which it is assumed that all right-thinking people will accept without question. It is not exactly forbidden to say this, that or the other, but it is “not done” to say it… Anyone who challenges the prevailing orthodoxy finds himself silenced with surprising effectiveness. A genuinely unfashionable opinion is almost never given a fair hearing, either in the popular press or in the high-brow periodicals.”

            George Orwell

Commentary & Analysis

EUR/USD: Are we there yet?

Though we can all guess and analyze and research and talk our positions, we never know when a trend, in any time frame, is over without the gift of hindsight. Many will tell us they have such a gift, but Mr. Market doesn’t work that way.

We do know one thing:

Extreme Price = Extreme Speculation

The paradox: At peaks most people are bullish; at troughs most people are bearish.

Or as the great John Percival put it: It is the Tao of the market. It is and has to be this way. John symbolized this simple yet powerful concept by using the classic yin-yang symbol, which is the logo on his newsletter—The Currency Bulletin.

But without the gift of hind sight we must rely on a combination of qualitative and quantitative factors—and intuition (a nice term for guessing based on factors one can’t verbalize).

I just want to share a couple of weekly chart I sent this afternoon to our Black Swan Forex subscribers who are short EUR/USD and sitting on some nice open profits. We add this technical evidence with the understanding the trend is our friend, but our friend may be getting a bit long in the tooth…

EUR/USD Weekly [last 1.0859]: The rationales for EUR/USD heading to par, or beyond, make sense. The risks are real. But Mr. Market has picked up a lot of riders on the way down and now it is hard to find a euro bull anywhere. The idea of an extreme bet is also being justified on the idea the move out of euro is long-term structural in nature and though fund managers are putting money to work by investing in European stocks, they are hedging out the currency risk, thus not adding to euro demand. (See open interest extreme chart for CME Euro currency futures second chart below)

Below is a weekly chart of EUR/USD. It shows: 1) long-term weekly trend line, 2) swing low support, and 3) a key extension target, i.e. Wave C = A, all coalescing near 1.0760; we aren’t far from that now. So, I think we need to be open to idea a very playable multi-week bounce has the potential to materialize.

Euro Futures Daily: The blue bars at the bottom pane of the chart represent open interest levels (open contracts) for the euro. No doubt there is a heavy one-way bet. What is interesting is the pattern after an extreme in open interest levels is reach, i.e. we see a peak in open interest then a tapering off, then a turn in the currency. We saw this pattern the last two times a significant bottom was made in the euro back in May 2010, the rally started in June 2010. Then again back in the beginning of June 2012, the rally began the third week in July. The latest double-top high in open interest was early in February; a similar lead time to suggest (on this very small sample alone) a rally in euro may be near.

If we add the open interest (sentiment data) information to the other technical work, at the very least we should be cautious of the idea of a continued trend move to par as many are now expecting.