Technical analysis is a controversial art form. A lot of investors think it is mumbo-jumbo but I have yet to find a single investor that doesn’t look at them and at least muse a little.
The argument against them is that they do not tell the future. However they do tell the past and they do tell of the now. When you can be forgiven for feeling in the dark, charts throw light on where we are now and where we have been. Theoretically this shouldn’t give us a tiny clue about tomorrow. That is because in a perfect market the price is right and the future utterly uncertain. Well the market is no longer free and pricing no longer perfect. There is an economic war under way and old fashioned market perfections have been sorely eroded.
In this environment charts can tell you a lot of what you need to know about the past and the likely future. For me this is the model. Euro is strong when the Euro is in threat of break down from the weak countries leaving. That Euro would be more like the D-Mark. The Euro is weak when the Euro is less under threat of disintegration because the only way out of the crisis if the Euro stays together is through devaluation and reflation.
Then there is risk. What is the red flag for risk. It is the Pound Yen. The Yen is a haven, it is also a massive currency. The pound is a kind of dollar but one which has already gone down the path of “austerity” and attempted rebalancing. A strong Yen against the pound is the pressure dial of the financial crisis. The stronger the yen, the greater the risk in the market. The great the risk to the Europe and the Euro, the stronger the Yen spike. Notice how the market doesn’t like a strong yen. Rather it is that the market doesn’t like increased risk to the global economy.
So where are we now. Here is the chart of Dollar Euro. All I can say is wow……..
You do not have to be a charting genius to see a double top here or the self similarity of the last two years of trading. If this symmetry were to continue, the Euro is about to rocket. This would mean a Euro disintegration with at least Greece, most likely Spain, Italy etc falling out of the European currency zone. That move would start imminently.
Here is the chart of the Yen Pound pair. What does it say? It says, there is risk but nothing to terrible.
So what does this mean. It means that September will be the moment of truth for Europe. If Europe can hold itself together then the Euro will fall to dollar parity but if it doesn’t the end is coming fast now.
Why would the Euro go to parity? Because its Champagne or bust for the Euro. When markets are free they become periodic and the next few weeks will set the new trend.
Meanwhile it is the easiest thing in the world to stick a trend line under the Euro chart, the trend couldn’t really be clearer even though the outcome is unknown. If the Yen starts to rocket against the pound it will be time to be extremely cautious. Bad tidings will likely follow.