Monday, February 22, 2010

EURUSD—rally time?

Time to pull back a bit and look at where Euro has been. Back in early to mid-January, I wrote many times about the bear flag that was on the EURUSD daily chart e.g.

I wrote then that the target could be 1.34. This past Thursday, the pair reached 1.3444. Close enough, as they say. I've also been recently posting the three-hour chart that shows the nice stair steps down as it has reached this low.

There's a fair amount of bearish sentiment towards Eurozone and it wouldn't surprise anyone if the pair continues to drops. I've heard such targets as 1.25 tossed around and this doesn't seem unreasonable. I've also heard targets much lower, down to the 1.10 area which would certainly cause a flurry of news headlines. The real question for shorter-term traders is, what now, what about in the next week or so?

I've said it many times. No pair drops straight down and even this stair stepping dance the Euro has been engaged in is a pretty intense drop (see last Friday's 3-hour chart and the daily chart below). At some point, one usually sees the rotten-titled "dead cat bounce" (DCB) where there's a more significant rally in a pair. A DCB comes about because people are bottom-fishing (trying to guess where the bottom might be). It's further fueled by traders covering short positions. Often there's an event that sets off a last decline before the DCB kicks in (Greece's problems could qualify). The DCB's chances for real success—i.e. a sustained upward movement—are usually grim and the decline resumes after whatever rally takes place.

If there is a rally, how high could it go? If my Elliott Wave (EW) count is correct, then price cannot exceed 1.4217 because that would have been the bottom of wave one. That doesn't help much because the Euro is now offered at 1.3603 (as of 7:19AM EST). Other possibilities are 1.3788 (the Feb. 3 high and more than achievable) and 1.4017 (the Feb. 17 high). A final possibility from my "worst-case" calculations is 1.4145. If the Euro closes above 1.36 again today, none of these are out of the range of possibility. However, my best take on this is that if this is a DCB, the rally won't exceed 1.4004. The 1.40 resistance is going to be fierce because of the psychological impact of the round number and prior resistance.

That said, my trading strategy remains the same in this pair as it was last week and that is to sell rallies. I still have part of a short position from 1.3700—if that's taken out, I'll be looking to short anywhere from there on up to 1.4000. Resistance is at 1.3670, 1.3750/88, 1.3900, and 1.4017.

As to what could happen if this isn't a rally….well, let's not go there, right now. But support is at 1.3500/24, 1.3444, 1.3361, 1.3247 and 1.3000.

There's slight bullish divergence on the daily chart but Euro overall still looks weak. More later on this pair. Here's the daily chart:

© Dianne Fecteau, 2010. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog, you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.

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