This week’s rally in the EUR USD has helped form a new main bottom at 1.2623. The main trend is still down on the weekly chart; however this new bottom creates an exit point for counter-trend traders.
Regaining the old bottom at 1.2873 came as a surprise to many bearish trend traders. Breaking this level right after the first of the year suggested the trend was going to turn decisively lower. After weak stop losses were taken out of the market, it seems no one was ready to begin shorting weakness and the market bottomed. This price is now new support. In addition, the uptrending Gann angle at 1.2703 could help give the market a lift.
On the upside, the first target is the old October bottom at 1.3145. This is followed by the downtrending Gann angle at 1.3207. Next week these two levels cross creating a possible resistance cluster. A test of either of these levels could turn the market back down.
Since the main trend is down on the weekly chart, it is still risky to trade the long side. Typically in a downtrending market the down moves are greater than the up moves in terms of price and time. At this time, the EUR USD appears to be a textbook example of this type of move.
The last rally was 4 weeks and .1102. A similar move from the 1.2623 bottom suggests that if this market is going to balance then 1.3725 within the next week is a possible target. This is unlikely, however, as the fundamentals have shifted since then. Based on this assessment and the methodical way it’s been trading, I still consider this to be a short-covering rally. Also 1.3000 may be too much of a psychological barrier.
Greece is still on the minds of traders. The problem just doesn’t seem to want to go away. Traders seem to be getting used to the drill, but they are still approaching the market with caution because of the risk of getting caught short if a major deal passes. So instead of playing both sides of the market like small speculators do, the funds and institutions remain short and poised to continue to trade that way but not as large as they were last week.
Patience is wearing thin because no one from banks to rating services is certain when and if a resolution will be reached regarding Greece. Uncertainty is the key because this is what triggered the liquidation of risky assets and the Euro several months ago. The conclusion is a deal will be reached, but once again it will fall short of expectations and we will likely go through this same cycle in a few months. If this is the case then enjoy the rally because the down trend is likely to resume soon. There is just too much still at risk to think the Euro has bottomed.
Even if Greece is rescued again then traders should look for problems to crop up in Italy, Portugal and Spain soon. Like I mentioned earlier, there is a vicious cycle in place that doesn’t appear to have an ending.
From a trading perspective, get used to the cycle of long down moves and short up moves. Until this trading rhythm changes, traders should take advantage of it and continue to look for shorting opportunities on the rallies. The bottom at 1.2623 is likely to be tested in the short-run. Under this level is 1.1800. There is literally nothing to stop this market from accelerating to the downside. The best thing to do at this time is to let the minor rally play out and prepare you for the next swing down.
Factors Affecting the Euro this Week:
- Greece Debt Resolution: Institutions to small traders are waiting for Greek to get its money or at least another lifeline. Everyone knows the game by now so there is no need to panic about the minor counter-trend rally taking place. It looks like it’s going to be a “buy the rally, sell the fact” situation.
