The sudden shift in sentiment late in the trading session on Thursday’s has created a confusing chart pattern for March Euro traders. One scenario identifies a change in trend to down on the daily chart while the other suggests the formation of a new bottom and the start of another leg to the upside.
The swing chart which is also known as the trend indicator turned down on Thursday when the Euro pierced the last swing bottom at 1.3027. The subsequent late session rally did not change the trend back to up, but the upside momentum was strong enough to suggest that the short-covering rally is likely to continue on Friday. Despite the strong close, the main trend will remain down unless the swing top at 1.3325 is violated.
Shortly after its main trend turned down, the Euro reached the 50 percent level of the major range created by the January bottom and the February top. This range is 1.2627 to 1.3325. The 50 percent level is 1.2976 and Thursday’s low was 1.2975. Whether it was bullish news regarding Greece’s debt crisis or huge buyers waiting to cover their short positions and reverse to the long side, the Euro embarked on an impressive retracement.
The strong close helped form a minor closing price reversal bottom which is often a sign that a major bottom may be forming. The only issue I have is that this type of bottom often occurs following a prolonged move down in terms of price and time. In this case, the market did reach a 50 percent level, but a 5 day break is hardly a “prolonged move”.
If you believe that Thursday’s reversal was enough to knock the short-traders out of the market and that sentiment is shifting back to the upside, then the first sign you should be looking for is a follow-through rally. This will occur if the Euro breaks through Thursday’s high at 1.3161. If this confirmation takes place then one has to call 1.2975 a valid bottom.
A valid closing price reversal bottom often retraces at least 50 percent of the last break within 2 to 3 days of its formation. The strength of the retracement has already reached this level at 1.3150. This makes the 61.8 percent level at 1.3191 the next likely target. Finally Gann angle resistance drops in at 1.3205, creating a resistance cluster between 1.3191 and 1.3205.
In my opinion, the daily Euro chart is still suggesting trader uncertainty. And what better to confirm this assessment then to have the market trade in between a pair of retracement levels at 1.3150 and 1.3191. This area seems to be the pivot zone that traders will use to decide whether to take the market back up or resume the newly initiated downtrend.
Thin trading conditions may also be contributing to the uncertainty since big money is unsure about which direction to take and may be on the sidelines. This gives me the opportunity to lay the blame for the choppy price action on sloppy, undercapitalized traders who caved in when the market broke, but then chased it higher when a positive news story leaked about Greece. Traders should expect more of the same trade on Friday since there is nothing fundamentally available to allow investors to position themselves with clarity and conviction.
