Can the euro continue its rally?

Today I will follow up the euro story from Friday as it is a classic illustration of how I trade from charts and not the news.

Many observers are saying that the huge rally off last week’s 1.30 low is attributable to some comments that Mario Draghi – the European Central Bank president – made concerning his view that the high and rising eurozone unemployment data was not the result of the ECB money-printing and asset purchase programme. Ha.

The policy interest rate was left unchanged again. The conventional take – after the rally, of course – is that the statement was bullish for the euro. Therefore, all anyone needed to do was wait for this statement to be released, and hey presto – buy the euro.

If life were this simple, none of you would be reading my posts!

The market exists to confound the majority

My view is that the news follows the markets, not the reverse.

Whenever I encounter a trader who dismisses technical analysis but trades off the ‘fundamentals’, I ask “So how do you decide whether a piece of news is bullish or bearish – what is your methodology?” I usually receive a mixed message.

No, the sharp rally following Draghi’s statement was partly caused by short covering – the market has been generally bearish on the euro for a long time, as forecasts of a break-up have been rife.

And leading up to the Draghi statement, there was a radical shift in futures positions:

Non-commercial Commercial Total Non-reportable positions
Long Short Spreads Long Short Long Short Long Short
(CONTRACTS OF EUR 125,000) OPEN INTEREST: 194,251
COMMITMENTS
66,329 74,364 2,725 77,301 67,829 146,355 144,918 47,896 49,333
CHANGES FROM 31/12/12 (CHANGE IN OPEN INTEREST: -13,357)
-15,603 -2,442 -244 5,410 -14,652 -10,437 -17,338 -2,920 3,981
PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
13.1 38.3 1.4 39.8 34.9 75.3 74.6 24.7 25.4
NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS: 170)
42 59 17 43 43 94 110

The hedge funds (large non-commercials) dumped many more long positions than short. Also, the commercials (smart money) increased their longs and heavily dropped their shorts in the most recent week. The swing was a massive 27% to the bull side. Maybe the banks had an inkling what was in the statement! Is it possible that there is collusion?

So the speculators then were positioning for a bear move – and a bearish reaction to Draghi.

But after they had done that, the market caught fire! How’s that for timing – and poor forecasting?

My take on this? The market, which was caught flat-footed with too many shorts, was vulnerable to a short squeeze.

Remember the old adage that the market exists to confound the majority?

The bottom line is this: I advise all traders to monitor sentiment and Commitments of Traders (COT) data – and look to trade opposite to the herd. That is where the profits lie.

On Friday, I showed my working up-sloping tramlines:

EUR/USD spread betting chart

(Click on the chart for a larger version)

And my immediate target was the upper line in the pink zone.

And here is that chart updated to this morning:

EUR/USD spread betting chart

(Click on the chart for a larger version)

Overnight, the market reached 1.34, making that a hit, depending on exactly where you place the upper tramline.

But I also have a long-term tramline pair working:

EUR/USD spread betting chart

(Click on the chart for a larger version)

This is the daily chart going back to the prior pivot point (PPP) in October/November 2010.

The market has clearly broken above my centre line and is heading towards my upper line in the pink zone.

The Fibonacci 50% retrace level in the 134.50 to 1.35 area lies directly ahead and should provide huge resistance (as it did in late February 2012).

That means progress from here should be a lot more difficult.

The importance of trade timing

These are exciting times in the euro – and using my trading methods, good profits are being made. 

Trying to figure out the market direction from the economic data is a fool’s errand in my view.

For one thing, there is a mountain of relevant data out there, much of which is contradictory – hence the acres of newsprint devoted to ‘analysing’ it.

And for another, we are dealing with a leveraged product when we spread bet. That makes the timing of trade entries of critical significance.

No fundamental analysis is of any use in this area.

That is why I have developed trade timing to such an exacting degree.

• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading

Advanced tramline trading

An introduction to Elliott wave theory

Advanced trading with Elliott waves

Trading with Fibonacci levels

Trading with ‘momentum’

Putting it all together

• Don’t miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I’ve written them, just sign up here
. If you have any queries regarding MoneyWeek Trader, please contact us here.

  • Bronco Bill

    Yes John, and dont forget about the euro/pound.
    Since 29th December 2008 low of 1.03 I’ve followed the swings up and down in one of your( rising) tramlines.
    On the 16th July last year the pound hit not one or two, but three, intersecting resistance lines at 1.28- and its been down ever since, 1.20 today.
    A break of the bottom tramline at 1.16 could see a measured move to see at least the 1.03 level once again.
    Chartwise the pound does not look good at all against the euro……or the dollar for that matter. Buy Gold.

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