From Barron's Getting Technical column:
Extreme bearishness surrounding Western Europe's beaten-up currency paves the way for a short-term comeback.
THE EURO HAS BECOME THE world's most unloved currency. Considering that just a few short months ago it seemed to be on the path to replace the U.S. dollar as the global reserve currency, this tells us a lot about the challenges of predicting currency moves.
Technically, the major trend for the euro is still down although there are signs that the trade is getting a bit crowded. The market seems to be getting ready to serve up a surprise bounce to offer what may turn out to be false hope for euro bulls. At that point, the path towards more solid - and lower - technical floors will be cleared.
Can it reach parity with the greenback? Anything is possible but right now the sentiment picture has become quite contrarian. Veteran futures trader Jake Bernstein and proprietor of JakeBernstein.com, reports that his Daily Sentiment Index (DSI) shows an overwhelming absence of euro bulls.
This is a survey of traders and as of Friday's data it was at an extreme low reading of 5% on a scale of 0%-100%. In other words, all bearish euro bets have been made and that sets the kindling for any spark to ignite a rebound rally.
To be sure, this is a market in trouble. I cannot address the fundamentals but once a bounce is out of the way for the euro, the door likely will remain open for much lower levels, even if only an emotional overshoot of technical support.
For now, there are two price levels in play. Using the CurrencyShares Euro Trust (FXE) as a proxy, prices are now below 124.60, equivalent to a very important level (1.2460) throughout the life of the euro since it was born in 1999 (see Chart 1).
This was a place where euro bulls thought it was cheap enough to buy aggressively and that halted many declines and pullbacks in 2006, 2008 and 2009. But in technical analysis, the stronger a support level is, the more meaningful a breakdown below it becomes. Although the decline is clearly overextended in the short-term, the breakdown below it last month is ominous....MORE