Everybody hates the euro now. Time to buy

The European Central Bank (ECB) has a very simple plan: print lots of euros. It’s going to print €1.1trn between now and 2016.

The eurozone is getting into the swing of money printing, just as the US stops doing it. It can only mean one thing. The euro is going down relative to the dollar, right?

Well, I’m not so sure.

What if the market was expecting money printing? There are plenty of sophisticated investors and traders out there who have much more inside knowledge of the market than you or me.

These guys are only too willing to take your money off you! Some of them even get tipped off early by governments and central banks.

As a trader, you have to look behind the superficial story. Just because the ECB is about to start printing money, it doesn’t automatically follow that the euro is about to fall in value. Thanks to insiders, and smart traders, all of next year’s money printing might already be reflected in today’s price.

So today, I want to examine the possibility that the euro is now teed up for a big rally.

Everyone’s down on the euro

The recent plunge in the euro has been making a lot of headlines. And sentiment towards the currency, as measured by the daily sentiment index, has never been so negative. At the same time, sentiment towards the dollar has never been so positive.

This negative sentiment can also be seen by the number of long and short positions in the market. To find those numbers, I turn to my trusty commitment of traders data (which can be found at www.cftc.gov).

Here is the latest commitment of traders data for EUR/USD:

Non-commercial Commercial Total Non-reportable positions
long short spreads long short long short long short
(Contracts of EUR 125,000) Open interest: 450,262
Commitments
52,047 232,777 9,226 350,433 114,236 411,706 356,239 38,556 94,023
Changes from 01/13/15 (Change in open interest: 27,836)
1,189 14,068 2,115 18,499 7,527 21,803 23,710 6,033 4,126
Percent of open in terest for each category of traders
11.6 51.7 2.0 77.8 25.4 91.4 79.1 8.6 20.9
Number of traders in each category (Total traders: 237)
42 101 25 55 63 109 178

The data shows that as of 20 January, when the euro was still in freefall, hedge funds increased the number of short bets by 14,068 in a week. That led to a ratio of 4.5:1 shorts to longs.

Why did they do this? Well, hedge funds are trend-followers. This means that they bet in the same direction that the market is moving, whether up or down. A what a trend the euro was to ride!

But on Sunday, as the result of the Greece election was decided, the euro made a low at the 1.11 to the dollar and then started to rally.

 

The Fibonacci reading is telling me one thing: the Euro will rally

That 1.11 level is very interesting to me. 1.11 lies exactly at the 62% Fibonacci reading (a reading based on the rally from the 2000 low for the euro, and the 2008 high).

And the Fibonacci 62% level is a very important one in my book.  It often represents major support or resistance. At 1.11, the euro is being supported by the 62% Fibonacci level. That tells me the euro is about to rally.

What about tramlines? Well, as you can see in the 15-minute scale chart below, I had an excellent pair of tramlines in the works yesterday afternoon:

EUR/USD spread betting chart

I had a great prior pivot point (PPP) on the upper line, which is an important indicator that a tramline is reliable. Right now, the upper line has only two touch points so far, as does my lower tramline. Remember, ideally I would like to see at least three touch points on one of the lines. But this is a promising position.

If the market did poke above the upper tramline, it would be a sign that the market was starting to rally. And that would mean the ideal low-risk long euro trade was inside the pink, buy zone.

How did the situation develop?

A third tramline explained when to sell

EUR/USD spread betting chart

Well, the market did break above the centre tramline, came back for a on that same tramline and moved smartly back up.

That kiss was all the confirmation I needed to tell me that the trend was now headed upwards.

How high would the market go? At that point I established a third tramline (shown in the chart in green), which is of equal distance from the centre tramline.

It worked a treat. The market hit my upper tramline target where a cool 150 pips plus profit could have been taken.  Nice work!