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EUR/USD Tags Channel Top…Next Stop 1.28?

Last updated 10/1/2012 1:52 PM EST (GMT -5) 0 Comments - Add your comment

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Matthew Weller

Technical Analyst, GFT

Follow @MWellerFX

The EUR/USD rallied sharply this morning on the back of better-than-expected Manufacturing PMI data out of Italy, France, and Germany. However, this sharp rally ran into a brick wall near 1.2940 as the U.S. released its own stellar PMI data. As my colleague Neal Gilbert noted earlier today , as long as traders fear a Spanish credit downgrade by ratings agency Moody’s, EUR/USD rallies are likely to remain short-lived.

The growing fear of a Spanish downgrade is clearly reflected in the 4hr chart. This morning’s rally stalled perfectly at the upper end of the recent bearish channel before turning sharply lower over the past few hours. This price action has created a Bearish Pin Candle* o, indicating excess supply above current rates and foreshadowing a move lower over the next 24 hours. Based on the lower end of the channel, rates could fall all the way toward 1.28 before finding a temporary floor.

To take advantage of further weakness in the pair, traders could set a stop sell order at 1.2873 (under today’s North American session low) with a stop at 1.2942 (above today’s high and bearish trend line resistance) and a target at 1.2808 (ahead of previous support and the bottom of the channel). More aggressive traders could also consider simply selling near current market rates to lock in a more favorable risk/reward ratio. This trade idea would be invalidated by a rally above 1.2942 prior to entry, or if not triggered within the next 48 hours.

Potential Strategy: Sell if EUR/USD breaks below 1.2873, stop at 1.2942, target at 1.2808.

For more intraday analysis and trade ideas, follow me on twitter ( @MWellerFX ) and attend our daily Live Market Analysis webinars. Visit your local GFT website under “Seminars and Webinars” to sign up.

*A Bearish Pin (Pinnochio) candle, or inverted hammer, is formed when prices rally within the candle before sellers step in and push prices back down to close near the open. It suggests the potential for a bearish continuation if the low of the candle is broken.

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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.