How long can the euro's rally last?

John C Burford asks if the euro is likely to resume its bear market, or whether we will see an extension to its recent rally.

Over the weekend, the Spanish banks' bail-out was put in place, and markets overnight have extended last week's gains with huge openings. These dramatic moves have taken several markets to my original targets, including the euro, which I will cover today. I will get to the Dow later this week, as promised.

Recall, on Thursday I had taken a profit on my long trade at the C wave high and taken a new short position:

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.
12-06-11-MWT-01

(Click on the chart for a larger version)

On Friday, the market retreated and broke below my lower tramline. That was a potentially bearish development and my new short trade was looking very good.

Advertisement
Advertisement - Article continues below

But markets hold many surprises and I fell victim to one of them as I will describe.

Late on Friday, the market rallied and tried to kiss the tramline. That normally would be a great place to enter short trades.

But I smelt a rat.

Why I didn't press my short trade

I knew that the crisis in the eurozone would be coming to a head soon with all eyes on Spanish banks. Surely, they would not be allowed to collapse without a fight from the money men?

That is why I judged that this was not the time to press the short side. After all, only about a week ago, the EUR/USD had fallen sharply by five cents and bullish sentiment was on the floor.

That is why I had a feeling that my A-B-C rally labels could well be part of a larger A-B-C pattern.

Advertisement
Advertisement - Article continues below

So I kept my buy-stop at the 1.26 level at break-even. And with today's big up gap, I was taken out at the 1.2640 level on the opening for a 40 pip loss.

I placed this against my previous 240 pip gain for a net 200 pip profit.

Not bad, considering many traders would be nursing much larger losses on short trades. The army of shorts would have many protective buy-stops placed at the obvious position just above my old wave C high at the 1.26 area. And these were taken out on today's opening.

A new trade pattern in the making

Getting back to the above chart can you see that there is a larger A-B-C pattern in the making? The new large A wave is my old C wave, Friday's low is my new B wave and there could be the making the new C wave as I write.

The rally has carried to the extension of my upper tramline, which is resistance.

Advertisement
Advertisement - Article continues below

So, can I say that this is the rally high? After all, we have tramline resistance, there is a potential C wave high, and this morning's rally has carried to an exact Fibonacci 38% retrace of the May decline.

I mentioned that the rally has carried to one of my original rally targets. I set that at the 1.27 area, and the market has come within 30 pips this morning. I consider that a hit.

But will the rally extend? As I write, the market is coming off. This is typical behaviour gaps tend to be filled, or at least partially so. I will be watching the Fibonacci levels with eagle eyes:

12-06-11-MWT-02

(Click on the chart for a larger version)

On the 15-minute chart, we have a potential A-B-C. I shall assume this is the pattern being formed and if so, that implies another stab up soon.

The ideal turn for wave C is the area of the pink bar.

Advertisement
Advertisement - Article continues below

But the market has made a huge almost unprecedented gap opening, which has squeezed a lot of shorts. With these out of the way, can the market resume its bear market, or will we see a rally extension?

If the market does get to my pink bar, I might chicken out and take the profit on my new short trade. That is because at present, I have nothing to help me answer the above question.

There have been significant developments in the Dow which I want to cover on Wednesday, all being well.

Before I leave, I had a timely comment on US interest rates on Friday and already, they are rising today. The T-Bonds have tumbled by five handles' (the large number ahead of the decimal) in a week or so. I believe the bonds are trying to tell us something, and it isn't good (unless you are short, of course).

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

Advertisement
Advertisement - Article continues below

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/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
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

Most Popular

Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/investments/commodities/silver-other-precious-metals/600812/buy-silver
Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
Visit/investments/investment-strategy/600772/just-five-assets-matter-for-investors-portfolio-asset-allocation
Investment strategy

Just five assets matter for investors. Here's what they are

Every investor’s needs are different – but most can be met by the right combination of five investments
11 Feb 2020
Visit/investments/stockmarkets/european-stockmarkets/600725/is-2020-the-year-for-european-small-cap
Sponsored

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019