After the plunge in the value of the Dollar over the past few days, I have begun to think that the Dollar had fallen too far, too fast. Likewise, the Euro had climbed against the greenback too far, too fast. This wasn't surprising, given the shock delivered by the Federal Reserve on Tuesday. Even with the Federal Reserve's notice that it was reducing rates to 0%, and its new strategy of quantitative easing, the Euro had been rising rapidly (Dollar falling rapidly) for at least a week before the Fed's shock. By looking at the daily chart of the Euro (not shown, this chart shown here is the intraday for today), I couldn't help but notice that even the opening prices occurred outside the Bollinger Bands. That phenomenon can be easily seen on my previous posts of the Euro and Dollar over the past few days. That means that prices were printing at three to four standard deviations outside the norm. The statsitical probabilities of that occurring, much less being sustained at that pace, are astronomically and statistically small. Interestingly, today's retracement, as shown on the daily chart, is a relatively small one.
Needless to say, that is a parabolic price move by any standard or measurement. It is unsustainable for more than a few days. With such a rapid and powerful movement, we are more likely to see a Cahen bubble pattern rather than a long, sustained set of parallels (see earlier posts explaining the two, or Cahen's book). Thus, as I was reviewing my charts last night and noticing such extreme price movements, I began expecting either a regression to the mean (reversal) or a consolidation for a few days until the bands -- and market sentiment -- can catch up. We may then see another strong movement higher (for this chart, the Euro).
Does that mean the Dollar downtrend/Euro uptrend is over? Not necessarily, but we certainly need to take a breather for a few days, at the very least. After such a monstrous move in the currency markets so quickly, a consolidation period is not only warranted, it is expected. In fact, the more extreme a movement is, the more likely the market is to reverse rather than merely consolidate. We'll know which it will be within a few days. My bias is for further downside to the Dollar, but now that I have acknowledged my bias, I will try to ignore it in trading.
I have noticed also that after such a forceful and fast movement, there are often unintended consequences, or perhaps better said, unexpected effects, that follow within a few days. These unexpected effects tend to amplify the original movement. Forces are set in motion that become almost unstoppable, and we never know what those forces will be or what they will unleash! Sometimes those forces take a few days to creep through the financial system and take effect. Hence, my bias for a deeper Dollar plunge. But no one really knows. Anything can happen in the financial markets.
