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EUR/USD: Fundamentals and Technicals Support Selling Trade

Last updated 2/29/2012 1:32 PM EST (GMT -5) 0 Comments - Add your comment

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Matthew Weller

Technical Analyst, GFT

Follow @MWellerFX

The EUR/USD has had a rollercoaster of a day, with rates initially rallying in anticipation of this morning’s LTRO announcement before reversing and selling off sharply as Fed Chairman Ben Bernanke backed down on calls for more monetary easing . Basically, from a fundamental perspective, the European Central Bank continues to take steps to increase the supply of Euros, whereas Bernanke’s statement suggests a smaller chance that the Federal Reserve will continue to engage in such measures. This shift in monetary policy, if sustained, could continue to weigh on the EUR/USD for weeks.

From a technical perspective, the 4hr chart below shows that rates just broke below a significant previous level of support at 1.3365. The break below the 1.3365 floor paves the way for further drops over the rest of the week, with room down to the Fibonacci retracements of the 2-week rally from below 1.30 up to 1.3485 highs. The most immediate levels of support are 1.3290 (38.2%) and 1.3230 (50%).

Zooming in to the 1hr chart, it’s clear that the move below 1.3365 represents a significant break lower in the pair. This level represents the central weekly pivot point, or effectively the average price of last week, and a key previous low from Monday. Now that rates have broken below this level of support, it will be anticipated to provide resistance on future bounces. At this point, both the near-term charts and the fundamental picture are suggesting that the EUR/USD drop is not yet done.

To take advantage of a bearish continuation, traders could set a limit sell order at 1.3343 (representing a bounce to previous minor support) with a stop at 1.3407 (above the round 1.3400 handle) and a target at 1.3260 (just ahead of the 50% fib retracement on the 4hr chart, along with the Weekly S1 pivot at 1.3250). To account for potential support emerging near the 38.2% Fibonacci retracement, traders could look to move the stop to breakeven if rates drop to 1.3302. This trade idea would be invalidated by a rally above 1.3400 prior to entry, or if not triggered in the next 24 hours.

Potential Strategy: Sell if EUR/USD bounces to 1.3343, stop at 1.3407, target at 1.3260. Move stop to breakeven if rates drop to 1.3302 after entry.

  * NOTE: During publication, the EUR/USD dropped through the intended stop sell entry, so the article now represents a limit sell at 1.3343 *

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About The Author

Matthew Weller has been actively trading the various financial instruments including stocks, options, and forex since 2005. From his first exposure to forex, Matt was fascinated by the vast liquidity and volatility offered 24 hours a day in the forex market. He has specialised in currency trading ever since.

Matthew focuses on candlestick patterns and pivot points to identify logical trade entries and exits. In addition, he has discovered a passion for teaching others about trading and has conducted over 400 educational webinars on different aspects of trading the forex market. His analysis has been quoted in Reuters, MarketWatch, and on the NASDAQ newswires.