The euro hits my Fibonacci target – where to now?

Before I cover the euro, here are a few recent article titles on gold that I spotted:

The Argument For Cheaper Gold
Protect Yourself From Gold
How Low Can Gold Go?

These bearish articles would not have seen the light of day until very recently. It just goes to show the severe shift in sentiment from manic bullishness to deep bearishness that has overcome the market as it plunged to the $1,320 low last week.

As a trader, you can use this information to your advantage. This is part of your sentiment-gathering work – in addition to looking at the commitments of traders data and elsewhere – that I strongly advise you to do as part of your market analysis.

This sentiment switch helped me to identify a major low last week, and if we see many more such articles, my ‘fanciful’ upside target above $1,500 that I suggested last week may not be so crazy.

OK, back to the euro. When I last covered it on 15 April, I was looking for an A-B-C rally off the 4 April low. This is the picture this morning:


Euro/US dollar spread betting chart

(Click on the chart to see a larger version)

Although not picture-perfect, the rally has an A-B-C form (green bars) with the C wave top above the A wave top.

I have drawn in the Fibonacci retrace levels using the first rally high after the 1.37 top (red arrow).

This brings up an interesting point when choosing which pivot points to use when applying your Fibonacci tool on retracements.

Trader tip: I have found that after a relatively long move, such as we saw in February and March, it is good to look at the Fibonacci levels when drawn from either the top, or the next major top after that main top is in place.

Rally retraces can turn at either of these levels.

Two nasty head fakes

Last week, I was looking for a move up possibly to the 1.3350 area. But when it appeared that the new Fibonacci 50% level at 1.32 (see chart above) was holding, that was the time to look for a possible top.

Also, last time, I had the 1.3050 region as support:

Euro/US dollar spread betting chart

(Click on the chart to see a larger version)

And I said that if this support could be broken, that would strengthen the case for a resumption of the down move.

But the market played one of its many tricks – the support was broken, but the market recovered and went on to the 1.32 top. It then declined past the 1.3050 level and gave one more head fake:

Euro/US dollar spread betting chart

(Click on the chart to see a larger version)

Naturally, if short positions were taken on these support breaks, you would be in a losing trade and you may be stopped out, depending on your stop position.

These are the trials and tribulations of trading. But by using a strict money management rule, such as my 3% rule, you will not suffer unduly.

And if stopped out, you have the option of getting back in – if conditions warrant it. Just keep updating your charts with tramlines and Fibonacci levels and you may be presented with another trade.

And so it has proved.

 

But what does the short-term picture tell me? Here is the current 15-minute chart:

Euro/US dollar spread betting chart

(Click on the chart to see a larger version)

Here, we have the sharp move down off the 1.32 high, and then an excellent A-B-C rally (green bars), which took the market right to the exact Fibonacci 50% retrace.

Remember, the A-B-C form gives support to the idea that the main trend is down, of course.

That is the crucial information these A-B-C patterns give. This means that the odds favour trading from the short side.

This chart is looking much more textbook!

And the C wave high near 1.3120 was the place to re-enter shorts, if stopped out previously.

Also, I have drawn in my excellent tramlines, with the upper line possessing three terrific prior pivot points (PPPs) on the left side of the chart.

As I write, the lower line is on the verge of being broken. This is also a great place to enter shorts at low risk. Protective stops can be placed just above the most recent minor high in the1.3080 area.

Be your own pundit

With the longer-term downtrend seemingly in place, what does the commitments of traders (COT) data tell us? Does it back up my bearish stance?

Non-commercial Commercial Total Non-reportable positions
long short spreads long short long short long short
Contracts of €125,000 Open interest: 215,657
Commitments
49,321 79,085 5,758 121,372 76,858 176,451 161,701 39,206 53,956
Changes from 13/11/12 (Change in open interest: 14,368)
13,978 -7,116 225 -20,322 4,370 -6,119 -2,521 1,423 -2,175
Percent of open in terest for each category of traders
22.9 36.7 2.7 56.3 35.6 81.8 75.0 18.2 25.0
Number of traders in each category (Total traders: 354)
39 64 26 46 45 99 121

The latest data is certainly interesting! It is telling me that for that week, while the euro was in rally mode, the hedge funds (non-commercials) were getting really on board the long side, as were the small traders. The commercials however, were loading up on the shorts.

In this market, the question is always, ‘are the hedgies in love with the euro, or out of love with the dollar? Or both?’

An enormous amount of writing is devoted to analysing this question. But I prefer to examine the charts and sentiment myself.

If there is one piece of advice that can benefit all traders, it is this: cut down on reading opinion and ‘analysis’ pieces. Do your own analysis – I guarantee it will be much better than most of what you read!

OK, so the market is telling us that it wants to move lower – perhaps to my lower tramline just above the 1.30 area.

Short-term traders will be eyeing this level to take at least partial profits.

But longer-term traders will be looking at the previous major low in the 1.28 area as a viable target.

• 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

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