Exchange traded funds tracking the euro’s movements against the dollar have bounced within a narrowing range since the end of April, frustrating traders. Since U.S. stocks and the euro have moved together recently, equity ETFs could follow the currency funds when they eventually break out of their recent range, whether it’s up or down.
CurrencyShares Euro Trust (NYSEArca: FXE) “continues to trade in a tightening triangular range across the 50-day exponential moving average,” says Tarquin Coe, technical analyst at Investors Intelligence.
“With the primary trend being up, the sideways drift is assumed to be a bullish consolidation until proven otherwise (a break beneath $140 a share),” the analyst wrote in a newsletter Wednesday. “The range reflects uncertainty and for as long as it continues equities in the U.S. will face a headwind.”
Chris Kimble at Kimble Charting Solutions has also written about the so-called flag patterns in the euro and dollar currency ETFs. These patterns tend to vex bulls and bears alike due to their choppy nature and lack of direction, he says. This kind of market can be a meat-grinder for traders endlessly whipsawed by the back-and-forth swings.
Likewise, in stocks, the S&P 500 has been bouncing within a relatively small range this year, between roughly 1,250 and 1,370. Last week’s turbocharged rally vaulted the index from near the bottom of the range to close to the top.
“Equity indexes in the U.S. are nearing their April highs, levels which peg the top end of six-month ranges. Short-term indicators are overbought and in need of consolidation in the very least,” added Coe at Investors Intelligence. “Range-bound activity looks set to continue. In the meantime sitting on the fence is our preferred strategy until direction is more certain.”
The euro ETF was down nearly 1% on Wednesday in the aftermath of Moody’s downgrade of Portugal’s credit rating to “junk.” [Eurozone Debt Fears Hit ETFs]
SPDR S&P 500 ETF (NYSEArca: SPY)
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