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.

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