Options play: How low can the euro go?

August 26, 2014 07:56 AM

Fundamentally, with the 6E making a new low for the move, the ECB must make a decision. There are so many moving parts that could have an impact on the direction of the euro currency futures market.

First, we have the fighting at the Ukrainian border that has led to sanctions on both sides meaning the Russian side and the U.S. side. This has been causing problems and could cause more problems for the European economy. Second, there is the question of when the next shoe will drop in terms of which country will have a sovereign debt issue. Next, when will the ECB step in and start a QE program of their own and how much for how long, just the thought of it makes my head spin. Finally, ultimately in my opinion, it's Germany that holds the cards because they have the money and the strongest economy over there. Will they be willing to help? There are more moving parts like the U.S. Dollar, Gaza, ISIS, Iraq, Syria, and more.


Technical View

On the chart below I have placed my favorite technical indicators. They are the 9-day simple moving average (SMA, red line), the 20-day SMA (green line), and the 50-day SMA (blue line). I have also added the Bollinger Bands (BB's, yellow lines) and Candlesticks (red and green bars), each bar represents one day of trading on these daily charts.

Technically, in looking at my favorite and my most reliable technical indicators, I see September Euro Currency Futures in what I have coined as a "SUPER-TREND" down. In order to achieve a "SUPER-TREND" down here is what I have to see. First I have to see a cross of the 9-day SMA (red line) down and under the 20-day SMA (green line). The cross occurred on about July 15. The second thing I need is for both of the indicators to point on lower angles as the 9 is below the 20 and that took place a couple of days later when the 20 caught up on July 23 and started to point lower. Then finally, the market itself must trade below the 9-day SMA and then the 9 becomes the first area of resistance in a "SUPER-TREND" down market. If you look at the chart below you will see that all of these qualifiers are in place.

You can also see that 50-day SMA (blue line) pointing down sharply to and in my view it won't be long before the top line of the BB's (light blue shaded area) starts to point down also. As for the bottom line of the BB's, it is pointing lower on a very sharp angle too. Even better is that the 6E market challenged the first area of resistance the 9 day SMA and bounced lower keeping the "SUPER-TREND" down in effect.

So my indicators give me clear cut areas of resistance and support. The first area of resistance is the 9 day SMA, next is the 20 day SMA, then the top line of the BB's, and finally the 50 day SMA. The support lies at the bottom line of the BB's. Also all three SMA's the 9, 20, and 50 are all pointing lower on fairly sharp angles which is bearish according to my techs.


September daily euro currency


However, we are clearly oversold at this time according to my technical indicators as the market is actually trading below the bottom line of the Bollinger Bands (yellow lines). That is my support on the chart. Remember though, it's been my experience that markets can remain oversold or overbought for long periods of time especially when there is a fundamental basis for it.

I figured this out by placing my favorite indicators on the charts and studying them which I found at: http://www.markethead.com/2.0/free_trial.asp?ap=mmckinne , which is a web application that we have developed for our clients called MARKETHEAD where I get about 80% of all my research from. That means I get both technical and fundamental research from this web app and I am a veteran series 3 Broker of 15 years. So if I'm using it then maybe my readers should check it out. Yes?


Options play

Potential plays that could be considered here and now would to buy puts in a 3 to 1 ratio with a call as a hedge in case the market rallies drastically against us. Also I would consider selling deep out of the money calls. Remember, when you sell naked options you have unlimited risk and should have a "well-funded" account of risk capital.

For exact details on other types of risk, months, expiration dates, strike prices, and number of positions feel free to contact me at 312-277-0115 or mmckinney@zaner.com. In addition, I am by no means "married" to the silver market. I like to make trade recommendations to my clients in the direction of the existing trend whether the market be the precious metals, energies, currencies, financials, softs, grains and more.



About the Author

Matt McKinney is a full-service options broker at Zaner Group both buying and selling energies, metals, grains, softs, currencies and the 30-year bond market. My strategies include time frames of 45-120 days with the ability to liquidate at any time. I can be reached at mmckinney@zaner.com.

Whether you're a novice trader who wants to participate in options on futures or an experienced trader, you can also check out my blog at http://www.mmckinneyfutures.com/.