By James Hyerczyk

The Euro surged early in the session on Monday as upbeat feelings about the global recovery helped drive up demand for higher risk assets. Today's strong rally was a continuation of last week's bottoming action which was triggered by positive comments from Fed Chairman Ben Bernanke and European Central Bank President Jean Claude Trichet.

Bernanke told the Senate last week that he believed that Europe has the money to protect its currency from collapse. The market rallied on his comment because it meant that Europe would use all means to prevent sovereign debt issues from escalating. Trichet said that the ECB would not increase stimulus in the economy. This means that he believes that the economy is strong enough to not require any additional aid from the central bank. Both comments were supportive to the Euro.

Late in the session, the Euro broke from its high but still managed to hold on to most of its gains. News of a downgrade of Greece's debt by Moody's made weak longs nervous, triggering a profit-taking break. Many traders feel that the break was unnecessary because the move by Moody's was based on old news. Investors also feel more optimistic about the Greece's future finances.

Technically, two potentially bullish scenarios are taking place. From a daily standpoint, the main trend is down, but the currency was able to pierce through a retracement zone at 1.2164 to 1.2233. This move most likely took out stops on the way up. The main trend will turn up on a move through the last swing top at 1.2453.

A late session sell-off took the market back under the Fib retracement level at 1.2233. This could be a sign of a short-term top, but that cannot be determined unless the 50% level at 1.2164 is violated. If a new short-term range forms between 1.1876 to 1.2297, then look for a break back to 1.2087. Bullish traders will try to form a secondary higher bottom at this price. If it holds then look for the start of a major rally.

Last week's closing price reversal bottom at 1.1876 was confirmed this morning. Based on this pattern, watch for the start of a 2 to 3 week retracement with 1.2784 the next potential upside target.

In summary, the weekly chart is set up for a strong retracement rally to 1.2784, provided that the Euro holds a test of a minor retracement level at 1.2087.