The Euro bears were out for the kill today. There were so many bears out there that it felt like a wild forest. I’m a US dollar bull and thus also a Euro bear.
However, I was a little skeptical about the excitement in breaking the key 1.3433 (March 2nd, 2010) low today. I was expecting the EUR/USD to stay in its range for a few more days until additional news came out relating to the Greek bailout; however, a Euro crackdown started early in the Tuesday Asian session. By 7 PM eastern time, the pair was already challenging the 1.3450 level.
@alaidi had said the Euro-cat was about to run out of lives and die. Not surprisingly, he hit the bull’s eye. Considering the major movements in the currency markets today, I had a sub-par performance. The saving trade of the day was my long USD/CAD from 1.0153 which enabled me to end the day flat.
Today was a trending day. There was a trend, and markets stuck to it for the whole time. It’s very difficult to trade a trending day if you don’t recognize it early. Indicators typically become worthless and the only chart patterns you get on the shorter-term charts are straight lines. Using oversold/overbought indicators and other reversal signals is the perfect way to lose money. Selling or buying when the pair touches the trendline becomes the best way to enter trades.
The EUR/USD was headed south and nothing could stop it. The concerns over Greece was overwhelming and the key technical level of 1.3433 was broken. Not even better-than-expected German Purchasing Manager Index (and the EU one) and IFO data was able to prop up the Euro. The Portugal credit downgrade was just more lumber for the fire.
Right now, it seems like everyone and their grandmother is short the Euro and waiting for 1.3000. While I can see the Euro reach the 1.3200 and 1.2900 targets of many people, swing trade entries (which I don’t do because I don’t swing trade) has to be done with caution at these levels. Everyone is long the EUR/CHF and we know how that’s coming along. Additionally, markets don’t usually move in straight lines; The EUR/USD can easily have a correction to 1.3400 before plunging to 1.3200 or so.
Lastly, the more shorts are in play, the easier it becomes for there to be a short-squeeze. Now, just imagine, if positive news (whatever that would be) came out from the Greece fiasco. Everyone thinks that’s not possible, but let’s trackback a bit and see recent times in the currency markets where everyone knew where the Euro and the Dollar was going.
Oh, the good old days of the US dollar index at 74 and the Euro flying through the 1.5100 level. Wait, that happened in November 2009, or less than 4 months ago. “Dollar crisis” was the catch phrase and people were telling me I was going to be using dollar bills instead of toilet paper. I’m still using toilet paper.
We all know that markets can stretch out in one direction non-stop (e.g. U.S equities). However, 100% consensus always raises a few concerns. Additionally, the Euro move is being fueled by the doubts over the Greek rescue package and overall Eurozone cohesion. These are major issues where the likelihood of something along the lines of the Eurozone falling apart is a big fat tailwind. It can happen, but it’s a risky bet.
In sum, shorting the EUR/USD is probably the way to go, but with tight stops, good entry points, and an open eye for any news. Also, watch out for possible short-covering before the weekend summit.