I have a saying when I trade currencies: “price precedes fundamentals.” It serves as a handy reminder, if not a teaching aid, for these two important ideas: (1) economic fundamentals at the intersection of two or more countries are so complex that even professional economists are all over the map on predictions, and (2) big price moves and/or long-term trend reversals almost always begin weeks or months before everyone fully knows and understands the reason for them.

Let’s look at the euro chart and I’ll describe what I’m talking about with the two visible trends, the up move in 2009 and the slide in 2010.

Click on image to enlarge!

The uptrend off of the double-bottom around $1.25 at the height of the 2008-09 credit crisis was marked by two price events that presaged a clear grasp of the fundamentals. First, even as U.S. equities were selling off into the abyss below S&P 700 during the first week of March, the euro was staging a quiet rally toward $1.2700 after it bounced off of $1.2455. This was a clue that risk aversion (i.e., market fear) was subsiding and market players were now contemplating the full scope of what the Fed was about to do. Second, the confirmation from the Federal Reserve and Helicopter Ben that the cavalry was coming to the economic rescue with clear plans for quantitative easing came on March 18. That tall green price bar you see on the chart in early March was the reaction that week. But I had been saying for weeks that any surge through $1.31 would mark the end of the euro bear market. So even while some kind of short-term bottom at S&P 666 the week of March 9 seemed plausible, most of the world was still very nervous about investing in anything but good ole U.S. dollars. Did anyone know for sure when it would matter that the U.S. was printing so much new debt and should be punished with a sell off? Of course not. But if you watched the price trends with simple indicators and levels, you could make the call and be ready. The euro traded up to $1.31 and drifted sideways in the days before the Fed meeting. On the day of the announcement from Helicopter Ben, the euro launched over 400 points higher with $1.31 as the launch pad.

Now for the downtrend that began in late-2009 after the Dubai and Greece debt crises unfolded. I was on CNBC’s PowerLunch on Dec. 14 and explained why the euro was a sell at $1.4600 (video link in articles below). Then in January and February, I wrote the following pieces to describe my rationale for selling at $1.4300 and $1.3800 respectively. And this was when major FX houses like Goldman Sachs and Citi were saying to buy the euro looking for a rally back to $1.45!

What was I doing different than all the big economists with huge pools of data and big brains examining the output of big number-crunching computers? I was just following the price trend. It worked when I did it for 10 years on a trading desk and it still works. And it has made fortunes for thousands of other trend-followers in my lifetime. My primary tools are long-term moving averages like the 10-, 20-, and 40-week averages. I rarely draw straight trend lines on charts because they can be too arbitrary and strict. The straight lines on that chart in the video aren’t trend lines as much as high/low “swing” lines that mark significant support and resistance based on previous supply/demand action. In other words, they describe the actual battle lines drawn between players at prior price junctures.

I use swing high/low points in conjunction with simple moving averages. Because they are rolling measurements for longer periods and they can smooth out short-term price blips, weekly moving averages objectively tell you about trend. I call them ”fluid” trend markers. If you make a similar weekly chart as the one above and put 10 and 20-week moving averages on it, you will see how you could have used them to capture most of the up move in 2009 and then taken profits and reversed to catch the down move since December. I captured even more of those moves by having $1.31 as my breakout buy level in March 2009 and $1.5140 as my double-top level to signal profit-taking in late 2009. Once $1.4700 gave way, you could add significantly to short positions. I am using even longer-term moving averages now — the 50-, 100-, and 200-week — to show what the euro would have to overcome to reverse its current downtrend. Those trend markers will be heavy weights on the currency for the rest of 2010. In other words, I want to be a seller every time it rallies anywhere near them, just like I recommended in February when I said to “sell $1.3800” and the euro went right up and kissed that level before it fell another 500 points.

Holding Pattern Before “Sell the News”
Why isn’t the euro continuing the cascade toward $1.31 support? Well, it has been down to the $1.3275 area twice and is now bouncing. It’s bouncing because we don’t have resolution yet of the Greek debt crisis and many are waiting to see if the news could be so good that you can buy the euro, or at least cover large short positions. In other words, they are “buying the rumor” now. I think when we do get resolution of the Greek situation, it will be a “sell the news” event for the euro. This sovereign debt crisis will not be over this year, or next. It’s a long-term event that will be with us for many years. Until then, you have to favor the dollar over the euro. Once the euro breaks through $1.31, the next big target is $1.25. So, sell the rallies, and…

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