Here we will look at a live trade â a shorting opportunity in the euro. Itâs spiked higher but can the strength last? We donât think so lets look at why.
This article is being written at the close of U.S. stock markets on December 11th
Letâs look at the big fundamentals behind the recent dollar rally against the euro and see why we have a counter trend rally and why itâs likely to fail.
The Big Picture
Forex price trends are not driven by hocus pocus or science but by the economic fundamentals.
In recent months the dollar has pounded many of the major currencies on safe haven flows and the fact the global economy is in trouble and the euro zone is in recession. These fundamentals have not changed and furthermore, the interest outlook favours the dollar. The U.S was the first major economy which started to cut interest rates aggressively and other nations must follow and that includes euro zone and interest yield will narrow in favour of the dollar.
These are big fundamentals and they havenât changed and they drive the primary trend but of course you get price spikes within the major trend and one is occurring right now. The euro is simply rallying, as it was oversold and a look at the charts, will show this price spike is unlikely to last and is simply is normal counter trend action in a major trend.
The Technical View
Pull up a weekly chart to get the big picture and you will see an over extended rally with resistance at 1.35. Now switch to the daily chart and you will see exactly the same resistance level being targeted 1.35 â but can the euro close above it?
We donât know of course â but we doubt it based upon over extended short term momentum. You can get some clues by looking at price momentum and here we will look at 2 momentum indicators - the stochastic and the RSI. If you donât know how to use them look them up there very useful and covered in our other articles!
Short Term Price Momentum is Over Extended Odds Favour a Turn Down
RSI - You have an RSI up but coming up to over bought levels and higher than the last RSI reading, when the euro had its last major short covering rally.
Stochastic â This indicator is already trading at overbought levels and momentum is starting to wane, as the fast stochastic line loses momentum. A cross to the downside, will confirm the trend is turning back down and it looks like it will happen shortly.
Donât Jump Wait
At present at the close of U.S Stocks, the euro is trading at 1.3350 and we have had a high of 13405. We think that this currency is going to top out and the trigger for the trade, will be a cross in the stochastic and a turn down in RSI. We expect this to happen anytime now and give a low risk shorting opportunity.
The long Term Trend is Down
Sure the rise is spectacular - but the long term trend is down and this price spike looks like short covering within a major trend. The fundamentals havenât changed and the technical picture in our view favours the dollar.
A Proven Method for Trading With Low Risk and High Reward
The above method of selling short term price spikes into major resistance and waiting for momentum to turn down is an excellent way to enter trends in motion.
The trade has good risk reward, just wait for the signal from a turn down in momentum and watch the euro turn down and continue its long term down trend.