As we head into the Euro Leader’s summit, the Eurodollar chart has reached a critical level.
There are a couple of interesting possibilities with this chart I reckon. The Spanish bond yield chart might be showing the way.
The first chart below is the Eurodollar daily. Until this moves past the high at “3”, it looks to my eye like a chart that has plenty of scope for a decent downwards correction. In fact the rally over the past 2 weeks could be an ABC correction. I’ve shown this possibility with the red letters. If we made a “c” peak around here this would set up for a move below the blue “a” and a decent correction of the rally since August.
The Spanish bond yield chart casts a bit of doubt on the possibility of a downward correction from current levels though. I’ve noted in the past that this chart has done a good job of confirming turning points in the Euro.
We’ve been keeping readers up to date with this chart. My last post was on 8th October. At that time the yield had just broken below the support of the blue wedge line. I made the case that a break below the dashed red line at the bottom of the wedge would be bearish for this chart and bullish for the Eurodollar. Last night saw the Spanish bond yield break below this support. You can read this post by Clicking Here
The blue numbers on the chart suggest we could be in the final swing of a 5 swing structure.
There a couple of Fibonacci cluster zones below the current market – one at around 5.2% and another at 4.9%.If this chart was to stop at one of these levels that could indicate the end of the 5 swing downtrend. We could then be in for a decent upward correction in bond yields.
That sort of scenario would be consistent with a bit of a false start in the Eurodollar. 5.2% is a lot better than the 7.5% that confronted us a few months ago but it’s not low enough to be a real “get of jail card” for the Spanish government.
What could cause a false start? Perhaps some initially bullish general statements followed by release of detail that the market found profoundly disappointing. Not from a Euro Leaders’ Summit surely?
So here’s a charting possibility for the false start scenario in the Eurodollar. We might be developing a butterfly terminal pattern here. I’ve projected how this might look on the chart below. This can be a really effective trading set up, especially where the final peak finishes at a Fibonacci cluster zone.
Under this scenario there could still be a sell set up in the Euro, just that it would start from a bit above the peak at “3” rather than just below it which would be the case if we get an ABC set up as outlined on the first chart.
As often happens when there is a potential pattern in a leading market like EUR: USD, you can see the same thing in other charts. EUR: JPY and CHF: JPY are a couple I have noticed.
Looking at the really big picture of the Spanish bond chart, the outlook seems bearish for the long term. The whole of the possible 5 swing move shown by the blue numbers on the chart above is itself just a large 3rd swing lower. If this interpretation holds true, another large swing lower in yields would follow any upward correction we make in the near future. This is a long term bullish scenario for the Eurodollar.
In the meantime, if we do get either an ABC or Butterfly sell set up in the Euro, I’ll post some more details. If it’s a butterfly I’ll include an explanation of how this pattern works.