Could we see a rally in the euro?

With intense interest in the drama unfolding in the eurozone, and market-shaking developments expected over the next few days, most traders are expecting to see the euro tumble. But could they be wrong, and could we see a euro rally? John C Burford investigates.

On Monday, I noted that the euro's sharp rally off the early October 1.32 low had taken the market to significant chart and Fibonacci resistance.

Below, you'll find the long-term daily chart of the euro vs the US dollar giving us the big picture.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The horizontal line at the 1.39 level represents solid support/resistance. Note, the line goes back to January. Since the summer, this line has held until the support gave way in early September, when the line became resistance to the rallies.

This line of resistance was challenged on Monday again and it held.

MWT-11-10-21-1

(Click on the chart for a larger version)

Advertisement
Advertisement - Article continues below

Note also that the 1.39 level is near the Fibonacci 50% retrace level another line of resistance making this area a very formidable barrier to further rallies.

In addition, this latest rally has carried the momentum reading into very overbought territory as marked by the purple box.

The odds heavily favoured a top for this rally in the 1.39 area.

Trader tip: When so many elements come together, as here, selling into the rally is actually a low-risk trade. There are no guarantees, of course, but protective stops can be set quite tightly in these situations.

New tramlines offer tremendous shorting opportunities

On Monday, I had a 'satellite' tramline, but now I can draw in a better-fitting set:

MWT-11-10-21-2

(Click on the chart for a larger version)

Advertisement
Advertisement - Article continues below

The upper one looks better, and so does the middle one and just admire the two 'kisses' as the market came back to the tramline underside (marked with yellow arrows).

These points were terrific shorting opportunities again affording a low-risk (tight stop) strategy.

With the two tramlines in place, I can now draw a lower equidistant tramline.

Following the second kiss, the market experienced a 'scalded cat bounce', thus giving me confidence in my short trade.

Trader tip: If trading a tramline 'kiss', I always look for a sharp move away from the tramline (the scalded cat bounce), as it usually means that my first target will be my lower tramline.

Sure enough, the market dropped right to my lower tramline yesterday (marked by green arrow). That was very pretty and a place to take profits on the short trades.

Advertisement
Advertisement - Article continues below

But with volatility already high, the market bounced sharply, but then zagged back down to touch the lower tramline and overshot it somewhat.

Trading here certainly requires nimble fingers on the mouse!

But where might the euro go now?

Since Monday, the market has traded in a consolidation zone:

MWT-11-10-21-3

(Click on the chart for a larger version)

We have made lower highs since Monday, so let's see if I can draw in some down-sloping tramlines:

MWT-11-10-21-4

(Click on the chart for a larger version)

Advertisement
Advertisement - Article continues below

My upper tramline is pretty good, and so is my lower tramline. I like particularly the touch-point highs to the left of the chart.

This morning, the market rallied up to the upper tramline and is currently in the process of easing back down off it.

Since the market overwhelmingly expects the euro to decline, and because I am generally a contrarian trader, I am on the lookout for reasons why the euro can rally to confuse the majority.

But let's see what the market thinks. Here is the latest Commitments of Traders report.

LongShort
Hedge funds17,00091,000
Small traders35,00062,000
Total 52,00052,000153,000
Trade (banks, etc)170,00069,000

Advertisement
Advertisement - Article continues below

Speculators, by a 3:1 majority, expect the euro to fall.

Remember the old market adage: "When something appears obvious to the majority, it is obviously wrong". But timing is everything.

I would say that if the market can rally past my upper tramline, that should propel it much higher towards the huge 1.39 resistance I have mentioned, perhaps and right through it?

This is an intriguing thought. That would place my original 1.40 Fibonacci target in the frame and set the 1.39 level as support.

But if not, my support level at the 1.3650 area would be worth watching. Breaking that would set the market back on the downward tack.

Meanwhile, the market will probably trade within its recent range until some market event occurs and that could happen at any time.

Advertisement
Advertisement - Article continues below

Prudence dictates that because the weekend could be a market-changer, evening up positions before today's close is the wisest strategy.

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 Trading with Fibonacci levels

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 .

Advertisement

Recommended

Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019
Visit/518908/betting-on-politics-28
Spread betting

Betting on politics: don't put your money on the SNP

Scottish voters are strongly opposed to another independence referendum, says Matthew Partridge. That opens up a few tasty punts against he SNP.
29 Nov 2019

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
Visit/520598/money-minute-thursday-16-january-a-batch-of-company-results
Economy

Money Minute Thursday 16 January: a batch of company results

Today's Money Minute looks ahead to results from a host of UK companies, plus the latest unemployment figures from the US.
15 Jan 2020