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Has the Euro ETF Bottomed Out?

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The recent drama arising out of Cyprus was an ugly reminder to the world that the euro zone worries are not over by any means. However, it virtually proved to be a non-event in the domestic U.S. market with no major consequences in the capital markets.

Still, the issue had certainly weighed on the common European currency after the euro started the year on a positive note. The Currency Shares Euro ETF (FXE - Free Report) which tracks the performance of euro versus U.S. Dollars (USD), had a good first month gaining around 3%. However, since then, certain issues within the euro zone had caused the euro to slide versus the USD (read Is the Dollar ETF About to Surge?).

The political scenario in Spain and the election outcome in Italy had caused huge sell offs in European equities (read Italy ETF Plunges on Election Chaos). This coupled with the Cyprus bailout uncertainty had caused massive downward pressure on the euro. Also, despite some sort of clarity on the Cyprus front as well as the situation in Italy and Spain being comparatively stable, the euro continues to slide.

Beyond these short-term issues, it can be argued that the slump for the Euro for these region specific factors might be over. This is especially true considering that the European Central Bank (ECB) and its measures have for long been successful in restoring some sort of stability in the region after quite a disastrous 2011.

In fact, a technical look at the Euro ETF FXE, suggests that the ETF is on the verge of bottoming out. As we can see from the above chart, the ETF has witnessed a fair amount of consolidation near its 200 DMA line (blue). This crucial level was breached marginally on yesterday’s (Monday) trading session when the ETF slumped a tad more than 1% to close at $127.46.

Still, this should not be mistaken for signs of a further slump, at least not yet. In fact, the past few days were pretty eventful considering the Cyprus situation and a decent level of volatility was expected on the ETF (see Is It Time for the Spain ETF?).

Given this, it is very important to have an unbiased view on the movement of the ETF going forward which is independent of any major catalyst. This is the reason why the next few trading sessions will prove to be vital for the ETF, at least in this holiday shortened week.

On an analytical front, a more concrete assertion arises out of the fact that FXE has an extremely strong support in the 200 DMA line which has developed in a strong consolidation point for FXE. Also, it will be interesting to see if Monday’s breakout of this support carries it further down. The odds of a further slide and a consolidation are quite evenly poised at the moment (read Bet on the Euro with These 3 ETFs).

A look at the RSI chart reveals that the sell off in the ETF has been extremely vicious since its February 2013 highs. The RSI shows that the ETF has been on and near the oversold territory for quite some time now and an up-move is long overdue.

Also, the Bollinger Bands have been seen contracting of late suggesting relatively lesser variation than before. However, the strong selling pressure on the ETF is surely a matter of concern.

Bottom Line

Investors having long positions in the ETF should not liquidate the positions just yet. The next few trading sessions will pave the way for the future course for the ETF at least for the near term.

In this regard, the 200 DMA line should be closely monitored. A gradual dip below this line would indicate weakness (see more in the Zacks ETF Rank Guide).

However, for investors seeking to initiate long positions in FXE, current levels provide good entry points as most of the recent negative news arising out of Cyprus, Italy and Spain seems to be factored in the current level. The ETF also has a Zacks ETF Rank of 2 or ‘buy’ so we are relatively optimistic on the medium term for this fund, suggesting this could be an interesting time to dive into this currency product.

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