As we noted in the most recent weekly technical preview report (see “Classic Technicals: The Week Ahead, Dec. 25-30, 2011” for more), the recent price action in the EUR/USD implies that traders should be looking for selling opportunities. While the pair has bounced since setting 11-month lows in mid-December, the bounce has been very timid, only covering about 130 pips in two weeks thus far. The modest bounce is indicative of profit-taking around the illiquid holiday trading period, but when traders return to their desks in January, the technical structure of the market implies that the longer-term downtrend is likely to resume.
The 4hr chart, meanwhile, reveals a specific selling opportunity if the near-term bounce falters. Rates have followed the bullish trend line higher over the past two weeks, with 5 separate tests confirming that the trend line is significant. If bears are able to push rates below this ascending support, the EUR/USD is likely to fall to psychological support at 1.30 or 11-month lows at 1.2950 in short order.
In order to take advantage, traders could set a stop sell order below this week’s lows and the bullish trend line at 1.3040, targeting 11-month lows at 1.2950. The stop for this trade could be placed at 1.3100, representing a key round handle as well as previous resistance from last Thursday. This trade would be invalidated by a rally above 1.31 prior to entry or if not triggered by the end of this week’s trade.
Readers should be cautious that the short Euro, long USD trade is fairly crowded right now. Indeed, bearish positioning in the euro remains near 3-year highs, with recent Commitment of Trader data showing three EUR/USD bears for each bull. With such extreme positioning on the short side, there is a higher probability of a short-covering bounce emerging over the next couple weeks; traders should be hesitant to remain in any short Euro positions for an extended period of time. Accordingly, we will look to move stops to breakeven if rates drop to support at1.3005.
Potential Strategy: Sell if EUR/USD drops below 1.3040 with a stop at 1.3100, targeting 1.2950. Move stop to breakeven if rates drop to 1.3005
For more intraday analysis and trade ideas, follow me on twitter (@MWellerFX) and attend our daily Live Market Analysis webinars. Visit your local GFT website under “Seminars and Webinars” to sign up.
Any news, opinions, research, analysis, prices or other information contained on the trading.co.uk website are provided as general Market commentary and do not constitute investment advice. Trading.co.uk is not liable for any loss or damage, including without limitation, any loss of profit which may arise directly or indirectly from use of or reliance on such information.