Currency traders have been keeping a close eye on a major “flag” pattern in exchange traded funds that track the euro’s fluctuations against the U.S. dollar as the Eurozone debt crisis rages. Now, the pattern appears to be ending with a bearish signal for the euro, and possibly U.S. stocks.

The currency ETFs have traded in a narrowing range since the end of April with the back-and-forth action whipsawing many investors. A breakdown in the euro from this pattern would be a bad sign for U.S. stocks as they have been moving together. [When Euro ETFs Break Range, Stocks Will Likely Follow]

“Flag patterns are created by a series of lower highs and higher lows. They often tend to frustrate both the bullish and bearish crowds, since the majority of investors aren’t making money,” says Chris Kimble at Kimble Charting Solutions. “These patterns aren’t good per suggesting which way the breakout will be, yet when it does, the move is usually quite large.”

CurrencyShares Euro Trust (NYSEArca: FXE) was down nearly 2% in afternoon trading Monday. Markets in Italy and Spain were slammed on worries the sovereign debt contagion is spreading from Greece. [Italy ETF Sells Off]

The euro ETF fell below $140 a share on Monday as well as the lower end of the recent flag pattern, which is bearish from a technical standpoint. The next support level appears to be the 200-day moving average.

CurrencyShares Euro Trust

Chart source: StockCharts.com.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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