A body accustomed to motion, particularly when it is a foreign currency, will not sit still for long.

While the Euro may have sat calmly within the lower half of last Thursday's range this past week, all it took was Janet Yellen to go off script just once to get the greenback moving lower and the Euro by default moving higher, at the certainty of a continued dovish Fed under Madame Yellen.

While the euro had shown weakness throughout the European session and into the U.S. open on Wednesday it had firmed to a 4-day high before Yellen's confirmation and had closed above resistance at 1.3460 on a consecutive hourly basis before the big jump at 16:30 EDT.

Figure 1. RTT Ratio for Euro for 11/14/2013

Currently our Risk Tolerance Threshold Ratio, which is based on a tenet in Dow Theory for differentiating between an impulsive move and a reactive move, is recording a bullish shift for the 5-day pattern - see Figure 1.

(click to enlarge)
Figure 2. Euro 4-hour chart for 11/14/2013

While that change-of-direction on the 5-day pattern in itself is not so significant, when coupled with the bullish patterns already in place on the higher time frames it produces a buy signal, which points to a longer retracement, i.e.: rally, of the recent 500 pip price slide --see Figure 2.

Given the speed and depth of the late October / early November sell off there appears to be room above to 1.3650.

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Jay is the author of "The Secret to Trading: Risk Tolerance Threshold Theory".

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