The euro’s value to the dollar (EURUSD) was one of the more bullish currency pairs in the first half of the year, but the trend reversed in May. The chart exhibits the Wall Street adage that “markets take the stairs going up and the elevator going down.” I don’t see any technical evidence suggesting the downtrend is near an end.
The Chart
Since the beginning of August, EURUSD has been tracing out a small bear pennant. This comprises a tight triangle shape that characterizes a period of short covering by momentum traders. The lack of a meaningful bounce in price affirms the underlying downtrend, that supply is still overwhelming demand. Once the last of those buying back is out of the market, the downtrend resumes.
How To Trade It
The way I’d be looking to trade this is placing a stop loss slightly above 1.343. Reaching that level would make it clear that the pattern had busted. I’d estimate downside potential at 1.320 – chart support derived from the highs in April and May 2013.
ETF Plays
Those who trade exchange traded products can consider selling short FXE (CurrencyShares Euro Trust) or going long EUO (ProShares UltraShort Euro) if you’re comfortable with the added risk.
Currency Plays
Elsewhere in the currency space, keeping in mind long USDJPY (or short the yen’s value to the dollar) continues to look attractive.
Good trading, everyone.
