Compelling Evidence for a EUR/USD Reversal

Current Price: 1.3600
Wave Counts, divergent oscillators, pivot points, and risk reversals all point to a EUR/USD reversal. When is the reversal confirmed? Where is resistance if 1.3666 gives way? What is the bearish potential if the EUR/USD does roll over? Read to find out.

We start with the longer term wave structure. It has been our position that a major correction of the .8443-1.3666 rally began in December 2004. Correction unfold in 3 waves (unless the pattern is a triangle), so the 5 wave decline from 1.3666-1.1638 is likely just the first wave (A) in an A-B-C correction. The rally from 1.1638 has unfolded as a double zigzag pattern. Notice that the slope of the decline from 1.3666 is steeper than the slope of the rally from 1.1638 – this is a corrective attribute (more time but less price distance). An important time relationship also favors a turn from near current price. The 1.3666-1.1638 decline took 47 weeks to unfold. A Fibonacci turn date would occur at 47 x 1.618, which is 76 weeks from the 1.1638 low. Next week is the 76th week. If 1.3666 is exceeded, then measured objectives await from Fibonacci extensions (see S/R table for calculations) at 1.3719 and 1.3823. Coming under the December 2006 (and 2006 for that matter) high at 1.3364 signals that wave C is underway.

This daily chart shows RSI on the bottom and the risk reversal rate (with a 10 day moving average) on the top. RSI is in overbought territory and exhibits bearish divergence. The RR rate has come under its 10 day average, indicating that bullish sentiment may have already peaked. Also, notice the divergence in price action and the risk reversal rate at the 1.1638 low in November 2005. The current situation presents the exact same setup (in the opposite direction of course).

The red, green, and blue lines on this chart are calculated monthly pivot levels. The blue lines often hold as support and the red lines often hold as resistance. The EURUSD has softened at R2 (red line). MACD is also plotted here to show yet another divergence. The indicator remains bullish as long as the MACD line (black) remains above the signal line (blue) but the divergence is a warning that a top is near.

A look at the hourly shows a 5 wave rally from 1.3338. The 5th wave of this rally is choppy and consists of overlapping waves (this is called an ending diagonal). A break of the very short term support line seen on the chart should give way to 1.3524. Remember from the first chart that it takes a decline below 1.3364 to signal that a larger bear trend is in progress.