In late February, EUR/USD was threatening $1.25 again. It looks eerily like the U.S. stock market at this juncture — not cascading, but grinding lower. With the momentum thoroughly exhausted from the euro’s 65% retracement in the fourth quarter, the odds now favor new lows in the bear market that began last year. But that is going to require a weekly close below 1.2550, with November and December weekly closes marking 1.2586 and 1.2576, respectively. The week of Feb. 16 saw a penetration of December’s 1.2550 breakout test, but the low of 1.2512 led to a bounce and a strong close at 1.2835. The week of Feb. 23 put in a higher low of 1.2603, yet overall a bearish-tone close at 1.2673.
Is the euro building a base above 1.25 or just consolidating before the fall? Short trades below 1.30 are certainly tough to get any traction on, while 1.2992 was rejected on Feb. 23 and only a strong push through 1.31 will give any credence to a longer-term euro bottom forming. What’s new to worry about on top of a global credit crisis and recession is the resurgence of doubt concerning the fundamental viability of the currency itself. In a world where U.S. deficits, debt, and a deluge of Treasuries seem not to matter, the European Union has its work cut out for it restoring confidence and unity.
What is the technical situation offering traders? The range trade-congestion between 1.25 and 1.30 should be ending soon. One good opportunity has been to build small short positions on rallies to 1.30, with stop-and-reverse readiness above 1.31 in case the bottom holds.
Position yourself for the eventual break of support near 1.25, especially with February’s monthly close on the 80-period moving average (red line) on “Euro sell-off gets serious.” Accumulate June and September Euro FX puts at the 1.20 strike, while selling the 1.15 strike put on breaks to or below 1.25. The June 1.15 and 1.10 CME Euro option contracts have significant open interest, an indication they will be trading magnets and barriers. They also are significant support levels as indicated on the chart. Consider them volatile stair steps to parity in a macro view of the euro’s decline. Once the barrier at 1.20 is cleared away, there should be good action to trade between these levels in a long-term down trend.
Kevin Cook traded institutional FX for nine years before joining the Options News Network. He can be reached at kcook@onn.tv.
