Why the euro could surprise a lot of traders

Everyone and his dog is bearish the euro. But could they be wrong, asks John C Burford? Here, he lists five reasons there could be a bounce in the euro.

TABLE.ben-table TABLE {BORDER-BOTTOM: #2b1083 1px solid; BORDER-LEFT: #2b1083 1px solid; BORDER-TOP: #2b1083 1px solid; BORDER-RIGHT: #2b1083 1px solid}TH {TEXT-ALIGN: center; BORDER-LEFT: #a6a6c9 1px solid; PADDING-BOTTOM: 2px; PADDING-LEFT: 1px; PADDING-RIGHT: 1px; BACKGROUND: #2b1083; COLOR: white; FONT-SIZE: 0.8em; FONT-WEIGHT: bold; PADDING-TOP: 2px}TH.first {TEXT-ALIGN: left; BORDER-LEFT: 0px; PADDING-BOTTOM: 2px; PADDING-LEFT: 1px; PADDING-RIGHT: 1px; FONT-SIZE: 0.8em; PADDING-TOP: 2px}TR {BACKGROUND: #fff}TR.alt {BACKGROUND: #f6f5f9}TD {TEXT-ALIGN: center; BORDER-LEFT: #a6a6c9 1px solid; PADDING-BOTTOM: 2px; PADDING-LEFT: 1px; PADDING-RIGHT: 1px; COLOR: #000; FONT-SIZE: 0.8em; PADDING-TOP: 2px}TD.alt {BACKGROUND-COLOR: #f6f5f9}TD.bold {FONT-WEIGHT: bold}TH.date {FONT-SIZE: 0.7em}TD.first {TEXT-ALIGN: left}TD.left {TEXT-ALIGN: left}TD.bleft {TEXT-ALIGN: left; FONT-WEIGHT: bold}

It's been a while since I last covered the EUR/USD a month ago, in fact. It's just that there's been so much terrific tramline, Fibonacci and Elliott waveaction in gold and the Dow recently that the euro's been crowded out.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

But today could be a critical time for the euro, as I'll explain a little later. Let me set the scene.

A month ago, the euro was finishing up a wedge-shaped consolidation phase and was butting up against the major tramline on the daily chart:

12-04-24-MWT-03

(Click on the chart for a larger version)

Advertisement
Advertisement - Article continues below

The question then was: Will it or won't it?

In the end, the lower wedge support line broke. Not surprising, given the weight of huge selling, induced by the bearish noises emanating from the eurozone particularly.

So how's the euro looking now? This daily chart shows the situation this morning:

12-05-25-MWT-02

(Click on the chart for a larger version)

A sensible policy would have been to set entry sell-stops just below the wedge line around the 1.30 area. Being short is definitely the correct stance, so far.

You can see that the decline away from the wedge has been very sharp and relentless. The fall to the 1.25 area has also taken it to below January's major low, which confirms the major downtrend.

Advertisement
Advertisement - Article continues below

Everyone is short the euro

But as the decline gathered pace, the good ship euro is listing heavily to port, as every trader and his dog has rushed to the bear side! The euro is rapidly losing what friends it had on the starboard side. If this keeps up, the ship will capsize.

What trader wants to be long the euro? Surely, everyone knows the eurozone will break apart soon. Catastrophe! It's certain, isn't it? The story is all over the world's media. Who could possibly disagree?

Well, if I am to retain my contrarian credentials, I need to look for reasons to cover my shorts and even, dare I say it, go long.

And first off, here is one reason the latest Commitments of Traders (COT) data on the make-up of the futures market:

Non-commercialCommercialTotalNon-reportable positions
LongShortSpreadsLongShortLongShortLongShort
(CONTRACTS OF EUR 125,000) OPEN INTEREST: 356,674
COMMITMENTS
38,475212,3441,668286,56366,730326,706280,74229,968/75,932
CHANGES FROM 05/08/12 (CHANGE IN OPEN INTEREST: 35,637)
2,45332,33822033,965-2,98236,63829,576-1,0016,061
PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
10.859.50.580.318.791.678.78.421.3
NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS: 190)
298916484288136

Recall, the non-commercials are the large speculators hedge funds, bank trading desks, and so on. The non-reportables are the small traders.

Just compare the relative holdings of the large specs the bears have 5.5 contracts to each bull. And similarly with the small specs the bears have 2.5 contracts to each bull.

Advertisement
Advertisement - Article continues below

And note the week's changes a 15% increase in large specs bearish bets, and an 8% increase in small specs bearish bets.

What we can see is that traders large and small filled their boots with bearish bets in the week ending 15 May.

If my memory serves, this is the identical set-up at the $1,920 gold top last summer. Hmm.

And as the market has fallen since 15 May, we can be assured this situation is even more extreme.

Five reasons there could be a bounce in the euro

To my mind, this data proves the extreme bearishness in the market and could possibly be the full extent of it.

Advertisement
Advertisement - Article continues below

But as we all know, surely, just as one opinion prevails with such overwhelming force, that is the time the market usually surprises. Remember, markets exist to punish the majority.

The bears must be getting really comfortable with their positions as the market has fallen by over five cents in a month. That is long enough to become complacent, especially with the chorus of doom and gloom getting louder seemingly by the day as the day of reckoning approaches.

This is a classic herding behaviour.

So, at this point, I like to look at the charts. Here is the 15-minute chart as I write:

12-05-25-MWT-03

(Click on the chart for a larger version)

Several points:

Advertisement
Advertisement - Article continues below

1.Positive momentum divergence (green arrows) at yesterday's low Bullish2.Possible A-B-C pattern forming and in C wave Bullish3.Tramline break Bullish4.Can there be any new shorts left out there? Bullish5.The Dow is currently finding support, so the euro should follow Bullish

That is why I placed protect-profit buy stops in the market this morning. Where, I hear you ask? Let's zoom in:

12-05-25-MWT-04

(Click on the chart for a larger version)

This is the 15-minute chart showing a nice rally above this morning's minor high marked by the grey bar in the 1.2550 area.

With that move, I took a substantial profit from my short trade, and I am now long and protected by my close stop.

What should I expect to see now? With the market working its way through the overhead resistance from yesterday, I expect some backing and filling this morning.

Advertisement
Advertisement - Article continues below

But I expect to see a quick move up to my Fibonacci/tramline target area (pink box). If this occurs, that would place yesterday's congestion zone now as support previously resistance. This is the key event for my bullish case.

If the market follows this roadmap, a further rally to the 1.27 area becomes feasible. With the market so heavily short, very sharp rallies become entirely probable. This move could surprise a lot of traders.

We shall see.

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

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 .

Advertisement

Recommended

Visit/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

Visit/investments/commodities/silver-other-precious-metals/600812/buy-silver
Silver and other precious metals

You should all own some silver. Just don’t expect it to make you rich

Silver is cool, beautiful and immensely useful. But for investors it's the most frustrating of metals. Dominic Frisby explains why you should own some…
12 Feb 2020
Visit/economy/600802/money-minute-wednesday-12-february-grim-times-for-european-industry
Economy

Money Minute Wednesday 12 February: grim times for European industry

Today's Money Minute previews industrial production in the eurozone, plus the latest from America's central bank.
12 Feb 2020
Visit/economy/600814/money-minute-friday-14-february-the-latest-from-rbs-britains-state-owned-bank
Economy

Money Minute Friday 14 February: The latest from RBS, Britain's state-owned bank

Today's Money Minute previews results from RBS – Britain’s state-owned bank – and from pharma giant AstraZeneca.
14 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020