The sharp and explosive move higher by the euro Wednesday may have some thinking the worst is over for Europe's common currency. But as it retraces its gains, one top technician's chart work suggests the euro is going significantly lower.
"Historically oversold conditions in the euro set the stage for an incendiary move [Wednesday]," said Evercore ISI's Rich Ross, who added that the euro could touch $1.12 in the coming weeks. "But ultimately the euro is going lower."
Using a weekly chart, Ross explained that euro broke a key technical pattern that could presage more pain. Specifically, he pointed to the fact that the euro has gone below the "neckline" of a long-term head and shoulders pattern. Technicians often look to this type of price action as confirmation to sell.
"Any way you cut it, this breakdown is bad," he said.
As Ross sees it, given the severity of the technical breakdown, the euro is likely to test or even make a new all-time lows of 80 U.S. cents. He arrived at his target by subtracting the lowest point of the pattern, in this case the neckline at $1.20, from the height point, which is the top of the "head" at $1.60. He then subtracts that total of 40 cents from the neckline, which gives him his target of 80 cents.
Of course, Ross doesn't feel the euro's decline will happen overnight, and in the medium term, he does expect it will find support at the lower end of its trend channel around $1.05, at which point the currency could bounce.
But in any event, Ross' message is clear. "Ultimately, the euro is going a lot lower."