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Potential Downside For the Euro?

On March 28th, I took profits on a large portion of my Euro short position. My goal at the time was to await a potential bounce in the Euro that would provide a higher entry point from which I could add an additional short position. As the chart below illustrates, that plan has worked out well thus far (you can click the chart to make it bigger).

Now that we have seen a decent bounce, I have begun to add to my short position again in expectation of another leg lower in the Euro. I am expecting a drop in the EUR/USD down to approximately $1.28 (noted as "first target" on the chart).

As I have labeled on the chart, there is a potential head and shoulders formation in the making. If the EUR/USD breaks decisively through that $1.28 level (thus "perfecting" the head and shoulders and then stays below that level (treating $1.28 as resistance overhead instead of support below), I expect a drop to at least the $1.20-1.22 level.

On the other hand, potential head and shoulders patterns can also turn into triple bottoms (meaning that the "neckline" of the head and shoulders formation turns into a support level if the neckline is not broken). If the head and shoulders pattern is not perfected, this becomes a third point at which a drop in prices has "bottomed out" and can turn into a launching point for higher prices. Therefore, in light of this potential risk and in order to limit my downside exposure, I will be placing a stop at approximately $1.31. This stop would essentially reduce my short position back to the core short position I have had in place for some time.

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
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Currencies, Currency Trading, EUR/USD, Euro, Head and Shoulders Formation