Triple Confluence in This Currency Index

09/13/2010 11:37 am EST

Focus: FOREX

Corey Rosenbloom

Founder and President, Afraid to Trade

If you’re watching or trading the euro, there’s a key level right here that you need to watch closely to see what the outcome of this important test is.
What is that boundary?

Let’s look first at the euro index ($XEU) and then note the same level in the respective CurrencyShares Euro Trust (FXE).

Click to Enlarge

The chart above is for the euro index, similar to how the dollar index ($USD) is plotted.

Chart wise, the level that draws your attention should be the 128 level. That’s because three daily indicators align almost exactly at that point:

  1. 38.2% Fibonacci: 127.95
  2. 20-day EMA: 127.79
  3. 50-day EMA: 127.87

It’s rare to have these three indicators align exactly, but that is what has developed.

Does it mean it is an impregnable overhead resistance level that no euro bull shall cross? Absolutely not. They’ve crossed it temporarily already in early September, but the index has since fallen back beneath that barrier.

Resistance levels are always reference levels; never absolute, concrete walls. This serves as a good example of that concept.

Beyond the triple resistance barrier at 128, we have a price support level at 126, from the prior August low and the 50% Fibonacci retracement. It would be logical to expect the index to bounce between these levels until we see a confirmed breakout either way.

While you can’t trade the euro index itself (though you can mirror it with a futures contract), you can trade the respective ETF, symbol FXE:

Click to Enlarge

The chart structure is identical, only we get the added benefit of volume traded in the ETF.

Speaking of volume, volume has been steadily declining after peaking in August. That’s akin to what’s happening across the stock market, so this shouldn’t be that dramatic of a surprise.

The level to watch in the ETF is the $127.50 level, as seen by the crossing of the 20- and 50-day EMAs.

Though not drawn (to keep the chart less cluttered), the respective 38.2% Fibonacci retracement is at $127.49—exactly where it falls in the EMA convergence level.

Monitor this level extremely closely, and the resolution that springs from this test of triple convergence. It would be resoundingly bullish if the euro breaks above this.

By Corey Rosenbloom, trader and blogger,

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