If you are a strong swimmer the most dangerous thing you can do is to attempt to rescue a non-swimmer who is drowning. The non-swimmer can pull you down and end up drowning both the rescuer and the victim.
Germany finds itself in a similar situation in the euro zone. It is the strongest economy in the euro zone and is surrounded by non-swimmers who are demanding to be rescued.
The threat to the euro zone is not that Greece, or Spain, or Italy will leave. They will do all they can to stay in the euro zone because it’s their lifeline for survival.
The potential threat is that the strongest swimmer Germany could walk away before being dragged down too and the impact of this is seen on the long term monthly euro chart. The euro-dollar monthly chart is dominated by a strong and well established downward trend that has been in place starting May 2011 from the high at $1.49.
The price has moved up to the line and then retreated from the downtrend line. This is a powerful resistance feature on the chart. On current values, the euro must move to $1.29 to break above the value of the downtrend line.
The $1.24 support level defined the limits of euro weakness in 2008 and 2009. The downward trend pressure is well established so there is an increasing probability the euro will continue to fall below $1.24.
The next down side support is near $1.16. This is a relatively minor support level established in 2005. This level has not been strongly tested so traders will treat any consolidation in this area with caution.
The $1.16 level is the first downside target. The acceleration and spread of the Greek problems to Spain and other countries has the potential to drag the Euro to test support near $1.16.
If Germany moves along the path of leaving the euro then the $1.16 target will be exceeded. The next lower historical support level is near $1.07. The euro-dollar move below 1.07 does not move into uncharted territory and nor is it unthinkable. In 2001 the Euro was trading at $0.88.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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