The wild swings of the EUR/USD market are proving hazardous for traders. But is the euro about to top out? John C Burford consults the charts to find out.
I have been neglecting the EUR/USD recently, but quite honestly, I have had very little to say on this market as it has been in a wide consolidation phase for several days.
Consolidation phases are very tricky to trade, especially for the wider swings, as you are likely to get whipsawed to death zigging when you should be zagging, in other words.
Very short-term/day trading is certainly possible, but I am focusing on medium-term trades for my emails, as I believe they offer the best examples of how I use my trading methods.
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In early October, I sensed a difficult trading market as the new lows around the 1.32 area were accompanied by a potentially large positive momentum divergence.
Trader Tip:As prices fall and you are short most traders get more excitedly bearish and are looking for much lower prices ahead as new lows are being put in (the greed factor!).
But you should be getting more suspicious of the continuation of the move as prices fall. We are trading swings and ideally, we are attempting to get in near a turn and get out near a turn.
Keeping a close eye on momentum and looking for divergences is one of the best indicators I use to make me alert for an upcoming change of trend. This is a great example here.
The euro's strong rally
Here is the hourly chart:
(Click on the chart for a larger version)
I have marked the positive momentum divergence with green arrows. The rally started from the 1.32 level. It has carried to this morning's 1.39 area a huge rally (note the satellite' tramline I will talk about this in a minute).
Why have I not traded this rally after taking profits on my short trades? A good question. It is because the rally is eating into huge overhead resistance.
The consolidation period I mentioned above contains a lot of trading and because of the whippy nature of trading, many traders will be on the wrong side and nursing losses.
That means many traders both long and short will be glad to cover their trades as their losses are reduced as the whippy market moves back in their favour.
The market has shown them that their judgment was at fault, and so they will be stepping aside to preserve capital.
This situation would normally produce huge dips as sell stops are run. And so anyone trading long would normally suffer from their stops being hit time after time.
Now, in this case, we have seen no large dip. But this is quite rare. And that's why I have been standing aside waiting for the market to show signs of topping.
Is the euro topping out?
So, do I see any signs? Here is a close-up of trading:
(Click on the chart for a larger version)
I have drawn my main tramline across the lows off the rally from 1.32, which has some good touch-points.
But since Friday, this tramline has not been totally secure, as the market has been swinging around it, both above and below.
My upper tramline is quite good, but not great. I will not use it with any confidence for targeting purposes just yet.
But note the small satellite' tramline I can draw across the recent lows. That line may be significant later.
So where do I believe the market is heading near-term? Because the market is awaiting political developments in the eurozone, it will likely continue the rally over the next few days towards the Fibonacci 62% retrace level at the 1.40 area.
That level would be a significant challenge. Not only is it a major Fibonacci retrace, but there is significant overhead chart resistance there from 7/8/9 September.
This week promises to provide us with much action in all markets, and I will be watching them like a hawk. Meantime, I am keeping my powder dry.
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:
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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.
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