The euro is at another crossroads
The euro is at a crossroads. Will it keep falling, or is it set to recover? John C Burford looks at the charts to find out.
If you read my lastpost on the euro about a week ago: A textbook resistance trade in the euro, I left it with the euro lying on a short-term tramline, and at a crossroads.
Now, a week later, we have an identical situation, but on a larger scale.
Here is the chart from a week ago:
The market had rallied to just above $1.43 into solid overhead resistance and was heading down on 20 June. When I left it, the market was resting on my lower tramline.
But at this point, let's take a step back and examine the long-range daily chart. I constantly refer to long-range charts, because it is so easy to not see the woods for the trees when trading and that can be an expensive habit.
I need to remember where the major trendlines or tramlines are and where there is likely to be support or resistance. When you are peering at a short-term chart all the time, it is all too easy to miss the signs from the long-range picture.
Paying attention to history
Here is the daily chart going back a year and I have drawn my tramlines, which I regard as very workable.
The market is now resting on the central line at the crossroads.
If the market doesn't bounce up from here, it will in all likelihood move down solidly and trade between the lower tramline pair.
So now I have a clear picture where the euro is within my long-range tramline trio, so let's zoom in to the hourly chart:
The market staged a rally off the 16 June low and this rally was confined to a nice tramline pair. As the euro rallied into 22 June, I could see a natural place to set a sell-stop order to enter a short trade.
That was just under the lower tramline and under the previous support (marked by purple bar).
My stop? I reckoned that if I was filled on my order and the market managed to rally to the 1.4420 area (well inside my tramline channel), the market was not following my scenario of turning immediately down.
This stop was within my 3% rule, which I always use to limit loss in case I am wrong.
Let's see how this worked out. Here is the chart as of the close Friday:
Late on 22 June, the market fell sharply through my lower tramline and the support line, and I was stopped into my trade. At no time has my protective stop been in any danger.
As you can see, the market fell right to the major long-term tramline, and then bounced.
Isn't that remarkable?
I first drew this tramline when the May low was put in over a month ago. So this line was quietly working away during June, and was right there with good support on Thursday.
But on Friday, the rally fizzled, and by the close, the market is right back on the tramline support.
I believe market action early this week will decide which road it wants to take whether to stay above the central tramline, or to move below it.
But there is no guarantee that one path taken will not be re-traced just look at the stand-out example of a false breakout in gold in my last post: A classic false breakout in gold!
In the meantime, I can move my protective stop to break even, following my break even rule for a no-loss trade.
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