While most technical analysis is focused on stocks, currency markets seem to follow the rules a lot better. And right now, the euro is trapped in a giant bearish trend with little technical evidence saying it is nearing its end.
 
Trends in currency markets seem to last longer than in other markets. Perhaps it is the slow changes brought about by governments and central banks. But whatever the reason, it pays to ride these trends until there is real proof they are over. And right now, there is none. Paraphrasing a legendary chart watcher, the most bearish thing a market can do is get oversold and stay that way.
 
I last covered the euro’s fall here in January, suggesting that the declining trend was going to bring the euro back to a rate of 1.1685 per U.S. dollar at its birth in 1999 (see Getting Technical, “Strong Dollar Trend Will Boost Bonds, Small Stocks,” Jan. 5). In Monday’s trading, the euro changed hands at 1.0846, well below its birth price (see Chart 1).

Chart 1

U.S. Dollar Index


As the chart shows, it is once again oversold in the short-term according to such indicators as the relative strength index (RSI). The last time that happened was in January and the market barely bounced at all. The reason then and now is that the trend since May of last year is clearly to the downside.
 
The question many pundits ask now is whether the euro can reach parity with the U.S dollar. Given the bearish trend and how close that milestone is right now, the answer is yes, it can. However, the markets tend not to give the majority what they expect.
 
For example, it took three weeks for the euro to bounce in January after reaching oversold conditions in late December. That suggests a 1.0000 price will be defenseless against the bears. Oversold conditions will lead to even more oversold conditions.
 
However, there is one event that could create a significant bounce, should it occur over the next few weeks – confirmation of a bullish divergence on long-term charts. A bullish divergence is simply a lower low in price but a higher low in an indicator. Typically, it is price that reacts to the disparity and in this case that would mean a significant rally could be in the offing. The tricky part is knowing when the bottom of the current price low has been set. And we will only know that in hindsight after it actually stages a small rally.
 
Then we can look for signs it will start a larger rally.
 
Which is it? Is the trend intact or is there a divergence?
 
Again, the divergence has not been confirmed and that means the major declining trend must get proper respect as the dominant condition.
 
But markets are always changing and should a bounce develop to perhaps 1.1300 in round numbers then we will have to consider the alternative upside correction. I will reserve the word “reversal” for when there is a lot more proof that the euro has actually made structural improvements, at least on its charts.
 
Putting this in dollar terms, the greenback’s rally is still intact although its slope has been accelerating. That makes a short-term pullback likely but with it exploding higher from a seven-year coiling pattern in 2014 there is reason to expect it will be even higher next year (see Chart 2).

Chart 2

U.S. Dollar Index


Dollar strength so far in 2014 has been due to euro weakness. However, currencies in Australia, Canada, Japan, Sweden, Brazil, India and China are all in multi-year declines.
 
The dollar rules. The euro is not even in the same league right now.
            

Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.