How far could the current rally in EUR/USD go?

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EurodollarThe current rally in the eurodollar has continued setting new highs. Recently it breached the 1.3600 level, breaking above key long term resistance in the process and traders may be asking themselves how much further it can reasonably be expected to go.

In this article we explore some of the critical price levels where the pair might encounter tough resistance and the rally might finally stall.

The most obvious target for the end of the rally is the down-sloping trend-line on the monthly chart which is illustrated below. This connects the July 2008 and May 2011 highs and would indicate the current upmove reaching an eventual end-point at 1.4160.

The down-sloping trend-line on the monthly chart

The inverted H&S pattern on the weekly chart also gives an upside target of 1.4220:

The inverted H&S pattern

The break of the major down-sloping trend-line on the weekly chart meanwhile gives a much closer target of 1.3780:

The break of the major down-sloping trend-line

Other important levels and signs of exhaustion

The monthly pivots also offer important resistance levels with R1 at1.3787 and R2 at 1.3988.

Point and Figure

The 50pip Point and Figure chart can give fairly reliable targets – particularly for the minimum expectation. Currently the P&F chart shows the mid-term trend is up, with a target of 1.3900:

P&F chart shows the mid-term trend

Momentum

Other indicators can be used to access the strength of the trend: RSI, MACD, volume and Demark to name a few. What do they say about the strength of the trend and whether it is likely to endure?

On the monthly chart MACD is turning up from below the zero-line and has crossed its signal line giving the signal to cover shorts. On the weekly it has crossed zero and given a buy signal, which is in line with the mid-term bullish outlook. You have to get down to the 4hr and 1hr charts before divergences and more bearish signals show up, but these would only signal pull-backs of the longer-term trend not reversals, so overall MACD backs up the bullish trend.

RSI is slightly overbought on the daily but not very much. It hasn’t yet given a sell signal on the 4-hour. It is still rising but not yet in overbought territory on the weekly or monthly, so overall there is insufficient evidence of weakness in the trend from RSI.

Volume

Volume remains strong – of particular note is the high buying volume in January and in the second leg of the recent rally on the daily chart, which also corresponds to the month of January.

Demark

A TD Countdown sell signal was given on the 11th January and there was a subsequent sell-off, but markets recovered and went higher. There is no approaching signal on the weekly chart.

Conclusion

The nearest major target which could signal the possible end of a trend is still quite far away in the 1.3780s and is composed of two levels: the R1 monthly pivot and a target level calculated from the original break of the trend-line on the weekly chart.

The next target up from there is at 1.3900 on the point and figure chart and 1.3988, the R2 pivot. It is probable the trend will reach exhaustion at or between these levels in the short-tem.

It is quite possible, however, that looking at the longer-term, by which it is meant the next 1-4 months – prices may reach as high as the major trend-line joining the 2008 and 2011 highs at 1.4160 before encountering major resistance and reversing trend.

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About Author

I was born in North London and Studied at Goldsmiths' College London University achieving a BSC Hons in Social Anthropology and a Diploma in Journalism. At first I was interested in writing and travelling and I began my career editing a magazine for a city breaks tour operator called Travelscene; then I also managed their website. Later I became increasingly interested in the financial markets and trading. My first trade was spread-betting the SP500, using an overnight strategy – I remember one year it made me enough money for Christmas – I thought it was great how you could make money like that in your sleep! Later my interests turned to Forex because of its 24-hour accessibility, the many different currency pairs and because of my interest in international politics. I managed a small fund which I set up with the help of some friends and traded the markets for several years with some degree of success. I am a member of the society of technical analysts and have contributed original research to their journal; I now also help mark their diploma papers. I enjoy refining and developing trading strategies, in particular for my 'baby' the eurodollar. When I joined Forex4you in 2010 I thought it was a great opportunity, working as an analyst for an international foreign exchange broker.

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