An exciting time to be trading the euro

published 13 July 2011

There have been some pretty exciting developments in the euro since I last wroteabout it: The euro rallies but what now?

And the question posed what now?' was well and truly answered in spades.

Let's recap the position when I left the euro on 29 June. Here is the chart:

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The market was making a potential A-B-C corrective rally right to my upper tramline and was on a potential negative momentum divergence.

I said that if the market could punch through the tramline and reach 1.4460, my target was the 1.46 area.

Later on 29 June, it hit 1.4460. And, as we all know now, it came to within 30 pips of my 1.46 target.

But that was it the market simply plunged from that rally and crashed through all of my short-term tramlines. (These are now invalid for forecasting.)

Now my 1.4460 level was acting as resistance!

The late break on 5 July punched through support at 1.4460, which indicated short trades.

It was downhill from then on, with the market reaching the 1.3850 area before bouncing.

After such a sharp move, I always like to refer back to the long-range daily chart for perspective.

Here is the chart showing my long-term tramline trio:

The market is currently bouncing off the lowest tramline in the 1.39 area to correct a very short-term oversold situation.

Short-term traders will be taking profits in this period.

Long-term traders will be holding, looking for further moves down (but using protective stops, I hope!)

But what now?

There is no question that the euro is in trouble after defying gravity for so long.

The US problems, although not insignificant (!), are pretty well known and are out in the open.

On the other hand, eurozone skeletons are emerging from the cupboard almost daily. As I write, Italy has popped into the firing line.

Bond yields are moving up a bad sign, as more euro money-printing becomes a greater possibility. That will further weaken the currency.

With this background, I fully expect the recent 1.46 high to hold for some time, and I shall be trading from the short side.

But after such a swoon, I expect sharp counter-trend rallies. I will use these to position short trades, and I will be looking for A-B-C patterns on the rallies.

This summer is shaping up to be more eventful than most.

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John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.

He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.

As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.