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Where Are the Euro Shorts?

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If the shorts in the euro fail to get aggressive and foreign currencies continue to be resilient, then a continued US dollar downtrend could be on the horizon.

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If you simply looked at a chart of the euro over the last year or so, and didn't know about all of the problems facing the European Union, you could conclude that the euro was just experiencing a pullback in an ongoing uptrend. That's how good the technical action in the euro has been given the considerable problems it has been facing. From the recent May high in the euro at 149.40 to the July low of 139.50, it is down a mere 6.6%. This pullback so far isn't even as big as the pullback in the euro at the end of 2010.



The euro has been rising ever since the end of the first wave of the euro crisis that began in October 2009 and ran until May 2010. The first euro crisis was a much more severe downtrend. It took the currency down about 20% from over 150 to under 120. The euro didn't have many positive weeks during that multi-month move to the downside.















Currently the Swiss franc and New Zealand dollar are making new highs against the US dollar. The yen, Australian dollar, and Canadian dollar are getting close to making new highs. If those three currencies break out once again against the dollar, then trend followers need to take heed that this current situation is much different than the previous euro crisis. The currency markets could possibly be signaling that the US dollar downtrend would resume. The current chart of the dollar shows an ascending triangle pattern on the weekly chart, with a breakout level of 76. The dollar has failed twice so far to hold above 76 during the rally from May, so that clearly is an important technical level.



The 76 level also coincides with the 30-week moving average that the Stage Analysis trend following method uses. Currently the dollar is still technically in a Stage 4 downtrend, which it has been for most of the past decade besides a few major countertrend rallies.



So to summarize, the euro still has yet to come under the same magnitude of pressure it did during the last crisis. If the shorts in the euro fail to get aggressive and foreign currencies continue to be resilient against the US dollar, then a continued US dollar downtrend could be on the horizon.

Editor's Note: This article was originally published on NextBigTrade.com.
No positions in stocks mentioned.
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