Euro Breakdown!

The euro finally ended its consolidation phase and the next leg of the decline is on the way.

In Where is the euro going?, I said $1.25 or about $125 for CurrencyShares Euro Trust (FXE) was the point of major resistance. This move could take us to that level.

UUP is a diluted play against the euro, EUO is a daily double short on the euro, but will suffer from the compounding of the daily position. In the past year, FXE is flat, but EUO is down 5%. During a sustained decline, this distortion will work to the trader's advantage and a little more than double the decline in the euro can be achieved. That said, if you stay in it too long and sit through the consolidation periods, or worse, simply buy and hold for a long period of time, your returns will erode. In the past two years, FXE is up a few percentage points, but EUO is down about 15%. EUO is a trading vehicle, not an investment.

The big question is how the market reacts. Aside from the decline in January (which appears smaller here because I am comparing the S&P 500 to the euro), the U.S. stock market has been moving up in absolute terms, and as the chart shows, even more in euro terms. It is looking like the January drop was mainly China related, as many emerging markets and China stocks fell the most. However, if this recent rally is to end, this move in the euro could be the signal.

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