My first boss back in the Cretaceous Period observed early in my tenure that “You only need to know four things: who’s long, who’s short, who’s under water, and who’s nervous”.Â By last Thursday, the FX market was heavily short of EUR/USD (and apparently pretty complacent), while the few remaining longs must have been nervous indeed.
By the end of business on Friday, EUR/USD had experienced one of the nastier single-day reversals that I can recall. I had thrown out to some of my clients in mid-July that however poor the fundamentals seemed, technically a move to 1.2450 seemed possible. For the record, if I had gone short on that occasion around 1.23, I would not have been holding on until the 1.2043 low was achieved a week later.
Now that 1.2450 has been reached (actually, 1.2444 has been the high, but close enough in the daily timeframe), what is the outlook? One observation is that theÂ future ofÂ the Eurozone, and the Euro, only looks brighter because the European Central Bank has promised, if disaster appears imminent, to do something. The market on Thursday regarded this as a toothless threat; by Friday,Â under duress, there were more believers.Â Suffice it to say that no problems have been resolved.
So, should we be looking to buy EUR/USD on dips? On theÂ daily chart, at least as I read it, the Euro has not put in an upside reversal. It remains within a downtrend, although Friday’s bar is pretty scary. Then again, so was Thursday’s, just in the opposite direction. The market is clearly less short than it was last week, although there appear to be few players going long as yet.
If 1.2480 breaks to the upside, I would take another look, but until then, looking for places to sell EUR/USD still seems right. As Todd noted last week, when orders are structured, the trade should be done; entry, profit level, and stop should all be in place, making the only remaining chore moving the stop once the trade is under way so as to reduce the maximum potential loss. A downside target of 1.2250 seems plausible; as noted, if 1.2480 broke on the upside, I’d be inclined to be flat, if not yet looking to go long.
An entry is tricky, as we’re roughly half a Euro below the high. Given the substantial daily trading ranges we’ve seen in the past couple of sessions, itÂ makes sense to look for one of Todd’s three price patterns toÂ give the signalÂ rather than boldlyÂ drawing a line in the sand and declaring a top.
Best of luck!
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