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Tags: euro | Italy | charts | MACD

The Worst Is Over for the Euro

By    |   Monday, 10 June 2013 07:42 AM EDT

Europe has been a mess for about five long years now. And investors have rightly shied away from that area of the world for much of that time.

However, it's a mistake to wait until it looks like "the coast is clear" before making an investment in Europe.

For instance, my Ultimate Wealth Report subscribers bought Italian stocks when the sentiment for European stocks was at its worst. Yet that's when the bargains were to be had, so we bought ... when no one else wanted to. And that's one reason why we've been rewarded on that position while most other investors haven't been. I saw an opportunity, a discrepancy in the market created by investors thinking emotionally and thus, irrationally. At this time, we're up over 42 percent on that position.

How can the position appreciate over 40 percent when things have still been bad in Europe? It's because what the economy does doesn't exactly equal what the stock market is going to do.

Why? Stocks lead the economic recovery. In other words, when savvy investors believe that the worst is happening and is soon to be over, they begin buying. Why would they do that? They know that if they wait until there are confirmations that Europe is out of the woods, the best bargains will already be gone by then.

How did I know that Europe was a buy when horrible news was still coming out about Europe every single day? 1) I looked at the valuations. European stocks were trading at price-earnings ratios that were half that of U.S. stocks. 2) The chart indicated the worst may be over or at least close to being over.

I know everyone doesn't believe in chart analysis, but it's made me some of the best money of my life. Charts speak to us if we understand what they are trying to say.

I was seeing that the prices of many European stocks were extremely stretched to the downside from their major moving averages. Additionally, the moving average convergence/divergence (MACD) and relative strength index on the weekly chart were starting to produce positive divergences, which meant that the downward momentum was likely losing its steam.

In addition, I'd seen one of the biggest selling volume spikes just three months prior to our purchase that I'd seen in a long time. Bottoms tend to form after a huge selling surge like that within the following three to four months (sometimes sooner rather than later).

So with fundamental valuations being so cheap and the technicals indicating that much of the worst was likely coming to an end, I knew that if we bought in then, we'd most likely be glad we did just 12 months later. And that's just what happened.

And now, investors are still equally just as bearish on the euro. And investors feel justified in staying away from the euro, because after all, the European data haven't completely turned around just yet.

But remember, the key is to buy when you feel the worst is over, not when the recovery has been confirmed in the economy. The euro has struggled for five long years also and it's still trading toward the lower end of that five-year range. So why should it turn around now?

It's the charts that give the hints that the worst is likely behind for the currency. For instance, the euro began to fall from grace back in July 2008 and it didn't halt that decline until June 2010.

So it fell for two straight years and then began to bounce back through early 2011, but the rally fizzled out quickly from there. Since then, it fell all the way to July 2012 and finally put in its first confirmed major "higher lower." That was its first main "sign of light" at the end of its tunnel.

Since then, other technical conditions have firmed up. For instance, major moving averages on its weekly chart have gone from pointing downward to flattening out. Additionally, the MACD has pushed above the zero line and is curling upward above the zero level.

What does all of that mean in plain English? It means the statistical likelihood for upside now is very high relative to the downside risks.

Even more recently, on the daily chart of the CurrencyShares Euro Trust
(FXE) exchange-traded fund, which tracks the euro, we see that the price has climbed back up above its 50- and 200-day simple moving averages. Those are signs that the trend is likely turning upward again too. Additionally, the MACD on the daily chart just produced its first positive divergence in months. And the last time it did this, it was a bottoming out then too.

I know this is a hard pill to swallow since almost everyone is still negative on the euro (and admittedly it's not my favorite currency in the world either). But when sentiment is very negative and the technicals show marked improvements that they haven't shown in months to years, it's time to seriously look at the currency.

And if the euro turns the corner like I think, then it means that the money flows are finally heading back into the country rather than away from it. If we can see Europe begin to heal, that would be a great thing for the global economy, because up until this point, it's been a dragging weight upon the global economy.

So now it's time to stop believing all of the negativity about the euro. Oh sure, the euro still has some long-term hurdles to overcome, no doubt. But I believe the euro could be in "the clear" now for at least the next year or two.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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Europe has been a mess for about five long years now. And investors have rightly shied away from that area of the world for much of that time.
Monday, 10 June 2013 07:42 AM
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