The euro shows signs of life

As promised, I will cover the EUR/USD market today, as there have been a few developments since I last wrote on Monday.

As we all know, the euro has taken centre-stage this week. The ongoing economic and political crises seem to get ever more dramatic, with voices of doom dominating.

Usually, when sentiment gets so one-sided as it is today, I tend to look the other way, looking for weaknesses in the arguments of the majority in order to take the other side of the trade. That is the contrariness in me, I guess.

But I must confess, I am unable to make much of a fundamental case for being bullish the euro.

Of course, that applies to the US dollar as well! Except that the dollar has always been a haven of safety during a currency crisis, and is likely to lose the race to the bottom. This means currency cross-rates will generally favour the dollar.

In any case, I let the markets speak – and the price chart is the voice of the market.

So what is the market saying?

On Monday, I noted the market had fallen quickly down to my lower tramline, then run along it, forming a typical corrective A-B-C pattern, and was about to break down in a potentially large third Elliott wave.

Since then, the market has followed that script perfectly, with the market dropping by around 300 pips to yesterday’s low at the 1.35 area, which was my target set on Monday.

That was satisfying.

Here is the chart:

Euro spread betting currency chart

(Click on the chart for a larger version)

I was ready to short on the tramline break. And when the market made its 1.35 low, that was on a large positive momentum divergence, which alerted me to the need to tighten my buy-stops.

The resistance level (marked by the pink bar) was the obvious spot at which to take profits. My aim was to wait for the bounce to play out and then go short again.

Since then, we have seen a bounce and here is the 15-minute chart as of this morning:

Euro spread betting currency chart

(Click on the chart for a larger version)

The rally appears very reluctant, with many overlapping internal waves, a clear potential negative momentum divergence, and a clear A-B-C pattern (these are always counter-trend).

So the odds are stacking up that the end is nigh for this relief rally.

However, we must all keep in mind that anything is possible in the markets and all of my forecasts carry a wealth warning! Nothing is guaranteed and only in hindsight can we say that a particular forecast was correct.

That is why stop losses were invented.

Is now a good time to go short?

But this morning, with the rally just having carried to the Fibonacci 50% retrace of the wave down from Wednesday’s high, this is an excellent place to enter short trades in anticipation of the continuation of my third Elliott wave down, which started from the 27 October 1.42 high.

This is the bigger picture, showing the 1.42 high:

Euro spread betting currency chart

(Click on the chart for a larger version)

The plunge low to 1.35 carried the momentum to an oversold reading (marked by the blue box), and that was another reason to suspect a bounce ahead.

Also I have placed my pink bar at chart resistance from the early November low, which should provide additional resistance to further gains on this rally.

Finding the tops of rallies is one of my most difficult challenges in trading. 

I am effectively shorting into rallies and going against the minor trend. Rallies have the nasty habit of sometimes carrying on way beyond reason!

Without my methods, it would normally be a disastrous policy. But with them, I have confidence that many – but not all – of this type of trade will work out – and I will have the opportunity to take a big chunk out of any ensuing moves.

It is all about potential reward/risk. I expect the profits on my winners to outweigh the losses on my losers, because I use my 3% rule for protection.

Trading must be considered as a business: no single trade is of over-riding significance. What is important is my monthly account statements. 

That is why I wouldn’t advise getting married to a particular view and staying with it for better or worse. I think of trading as more like dating!

• 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:

Trading with ‘momentum’

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
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