EUR/USD: The Big Picture
On Friday the pair ended up down 1.44%.
It was not too long ago that people were talking about the end of the US dollar. Now the fear is the demise of the Euro. As the Euro is quickly approaching its nearly 5 year low against the USD there is no question whether one wants to be buying the Euro quite yet (no, by the way)… but it is time to start looking for signs of a reversal. Such a reversal will not be based on an opinion and may require one, two or possibly three entries, but a very large reversal is coming.
Technicals will allow us to stay with the trend if a reversal does not come soon, but allow us to be in the reversal if it does come.
Currencies have a strong tendency to overshoot significant price levels. While some stocks for example meet resistance or support and stop, very often currencies overshoot these levels clearing stops along the way causing further “overshoots” or breakouts.
So why do I think a reversal is coming? The problems out there are baked in already and this seem to be the final stage sell off as those that held on panic out of there positions and when people who have never traded a currency in their life decide it is time to short the Euro for some easy money. These likely are the reincarnated people who bought into the tulip mania back in 1637. Please understand, I am simply looking at this as a contrary indicator. Being short the Euro is fine right now (that is the trend and my bias has been down since Dec’ 09), until the signals dictate otherwise…and many of those inexperienced people will be left the holding the (empty) bag (someone always is).
There is lots of talk about how much this bailout for some countries is going to cost, the domino effect etc. If you are reading this you have probably already heard what the mainstream media is saying. But the Euro trades against other currencies, so the focus is on the negatives for the Euro right now, but we can’t exactly forget that helicopter Ben Bernanke has not exactly been tightening the reigns on dumping money into the US economy either. Bailouts, bank failures, and domino effects are exactly water in the bridge in the US either! At this time is it is simply a matter of fear, emotion and what side of the trade is garnering more focus.
Sooo…the demise of the Euro? Hmmm, maybe things will change a little, but I think not. The BP oil spill has a much bigger chance of causing a fundamental shift in how countries (and companies) operate….at least I hope for sake of our environment.
All that said, for the big picture there is a technical level to watch right now. That is what matters when it comes to trading this pair, and all those words above basically just take up space.
There is former low from back in 2008 at 1.2325. This is the closest level to keep an eye on. As mentioned, an overshoot of this level is not unexpected. If it holds (no break) then a long can be looked for but it is ways away. If that level is broken then it can be used as a pivot point. It is an important level so a break below and then a rise back above can provide an entry long with a tight stop. This is why it may take a few entries to get it right, but a big move will pay back the small losses several times over. If ultimately this area just above 1.2300 can’t hold, their is little support until the 1.1850 area.
So to sum this all up: Trade with the trend, but many contrary indicators are now pointing to a possible a reversal. At this point it simply means keep an eye out for this reversal and don’t get married to the short. The 1.2325 can be used a type of pivot point. A fall below can be traded on the short side, but a rise back above it (from below) can also be traded on the long side. Keep stops tight so the big moves pay off when they occur (and you aren’t on the wrong side of it) – volatility is still very high.
Best wishes.
Cory Mitchell, CMT
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