Anthony M. Cherniawski | Aug 01, 2012 03:11AM ET
Forget the spin! There is no disputing that the euro is in big trouble. How much trouble may be defined technically with the Head and Shoulders pattern illustrated in the chart below that has just been triggered. This pattern projects a minimum target of 96.60, meaning the euro may drop below parity…possibly in the next two months. The trading bands offer parameters for the major cycle highs and lows. In the last two weeks the lower trading band has not given any support to the euro. Should it continue its failure pattern, the situation may be very bearish, indeed.
The euro and the S&P 500 Index began sharing cycle tops and bottoms starting on May 2, 2011, when both indices peaked on the same day. The next shared interval was on October 4, 2011, when both indices shared an identical bottom. The euro peaked early this year on February 23, but made a secondary high on March 30, just a weekend away from the April 2 peak in the S&P. Finally, both indices made a low on June 4, 2012. Since cycles are measured from low to low, it appears that the indices are now on identical cycles.
In summary, should the euro fail, there is a better than 50% probability that the S&P Index will decline, too. The S&P 500 Index bears a Broadening Wedge formation with a failed final peak, which strengthens the probability of a decline. While it is not activated yet, if the S&P 500 Index should fall below 1100, the average target for the Broadening Wedge is 880.00. While this is a lesser known formation, it has a 94% reliability rate. (Source: Encyclopedia Of Chart Patterns, by Thomas N. Bulkowski, page 72).
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