Thursday, October 27, 2011

The Euro Short - Part 2

In my last post I talked about multiple levels of resistance in the 1.3850 area in the EUR/USD. Since that post the currency pair traded down to almost 1.3650 before bouncing on positive sentiment and short covering. Now that details from the Euro Summit have been made public the market has continued its relief rally and is currently trading back above 1.4000.

Fundamentally the Euro zone is still a mess. The problems in Europe will not be solved overnight, and the "solution" announced last night is far from guaranteed to be successful. The tricky part is that the short EUR/USD trade has been a very crowded lately making it vulnerable to short squeezes as the market drifts higher.

However above 1.4000 I can't ignore the longer-term favorable risk/reward of being short again. Plus now that the details of the European deal have emerged we can finally consider a "sell the news" trade. 1.4017 is the 100 day moving average and the 50% Fibonacci retracement of the entire 1.4940-1.3146 move is 1.4043.

I am short @ 1.4017 and 1.4037 (1.4027 average) ahead of the levels I mentioned above. My initial stop is fairly wide, above 1.4300. The 200 day moving average is 1.4174 which should provide massive resistance should the short squeeze extend beyond current levels. My initial downside target is 1.34-1.35 with a longer-term target of 1.20.

Wednesday, October 12, 2011

EUR/USD - A Tsunami of Resistance Overhead

The EUR/USD has staged an impressive comeback over the past week and a half - rallying over 700 points from low to high over that period. News of Europe coming to an agreement on a plan to tackle their debt crisis was clearly the catalyst behind the move. The large short position in the market also certainly played a role as shorts were reluctantly forced to cover as key resistance levels were taken out.

However, short-term positives aside, Europe is still fundamentally a mess. Just look at the Slovak vote on Tuesday. One small country (out of 17) almost single-handedly derailed the entire process. For reasons like this the Euro has zero chance of ever overtaking the US dollar as the global currency of choice.

Technically there is a tsunami of overhead resistance in the EUR/USD right above current levels. We closed today just under 1.3800 after hitting a high of 1.3834 earlier in the day.

The 1.3850-1.3875 level offers a tsunami of significant resistance that will be very difficult for the currency pair to overtake:

1.3848 - 50% Fibonacci Retracement from the August high to the early October low
1.3850 - Natural "whole number" resistance
1.3869 - 50 day moving average
1.3860/80 -  Previous support/resistance levels dating back to February, July and September.

In addition, the 200 day moving average is flattening out, while the 50 and 100 moving averages are both below the 200 day and headed lower.

I have been negative on the EUR/USD for a while. My last post on September 8th suggested getting short on the break below 1.4000 with an initial target of 1.3500/1.3600 (which actually occurred in just 2 days):

EUR/USD Breaches Key Support
I am now short again at an average of 1.3821 (I sold some today at 1.3832 and 1.3810). I am looking for a test back to the 1.3000 level with a longer-term target of 1.2000. Unfortunately I was only filled on 1/3 of a full position - I was also offered at 1.3840 and 1.3860 but price didn't quite get there. My initial stop is above 1.4050 just in case there is a silly short-squeeze pop on a positive headline.