Before you invest, let us investigate.
Brief Update on the Euro Short

It looks like the EUR/USD pair is respecting the boundaries of its broader channel trend lines (see below) first discussed in the latest Euro update post. This could be a bounce before lower lows, or it could be a repeat of the last rebound off the broader channel lower trend line to much higher levels. The key trend lines to watch to help figure out which major direction might be next are the primary channel lower trend line (labeled "B" in both charts) and the broader channel lower trend line (labeled "C" in both charts).

As depicted in the first chart (above), there is a nice confluence of technical indicators that would suggest that the Euro is up against formidable resistance at or around the $1.346 range. This price level was the former support level of the recent move down, a primary Fibonacci level, and it intersects neatly with the lower tend line of the primary channel (trend line "B"). All of these factors would point to the probability that the Euro may initially bounce off these levels and head lower as opposed to breaking back through to the primary channel. If this does indeed occur, the next level to watch would be the broad channel lower trend line (trend line "C"). A decisive break of that trend line would likely lead to at least the $1.31 price level for the next potential stopping point.

On the other side of the trade, discipline over conviction would lead me to take much of my profits from the recent highs off the table if the Euro breaks decisively back above the primary channel lower trend line (trend line "B"). As depicted in the chart below, a break back above the primary channel lower trend line ("B") and a potential retest of the upper end of the broader and primary trend line ("A") roughly "works out" to approximately the $1.40 price level--a level near or at which I would be thrilled to be able to add additional short exposure.

If there is a larger potential bounce, I would keep my core long-term Euro short position that I have had in place since the $1.46 level. I would also place automatic trade setups that would trigger upon the Euro reaching price points below the broader channel trend line (trend line "C") to catch a surprise move back down that breaks the entire longer-term trend line. It is my belief that once this larger trend line is broken, we will likely be headed back to at least the $1.20 range for the Euro as it trades against the US Dollar. I do not want to miss that larger move if and when it eventually comes, so I would leave in place the automatic trade setups (same concept as a stop loss setup) to be triggered once important lines in the sand are crossed.

Disclosure: Currency trading involves a high degree of leverage and risk. Please do not participate in currency trades unless you employ strict control of risk and can afford to lose your entire investment.

Positions: Short the Euro, Short the Yen.

Written By: Joshua Ungerecht

Currencies, EUR/USD, Euro, Fibonacci Levels, technical analysis, trend lines, US Dollar