The S&P 500 got smacked after breaking out from its recent range, threatening my stance that stocks were at an attractive buy point. The index is now testing chart support and its 50-day simple moving average, so we’ll see if that draws fresh demand in the coming days.
MEAN REVERSION PLAY
In the meantime, the euro has come to an attractive reward-to-risk scenario for long entry following a pullback over the past month. This is a fairly straightforward mean reversion play in a rising trend.
To sum up the reasoning, in the context of uptrends, price often reverts to the mean via a pullback or consolidation during temporary periods of profit taking, and from there resume their upward course to higher ground. Last week and yesterday, euro/dollar (EURUSD) tested the weekly mean (20-week simple moving average), which I’ve indicated with Bollinger Bands®. Concurrently, price attracted buying at 1.37105 chart support derived from the January 2013 peak, which cuts through the congestion later that year and early this year.
GETTING OUT
Your exit strategy would be pretty simple: stay long until the weekly mean turns down. You can estimate upside potential at 1.49398, based on the May 2011 high, but don’t spend much time on where price could go. You’re better off devoting your energy to other trades or gardening or whatever, and simply waiting for your rule to tell you when to take a profit (or a loss if the rally doesn’t materialize).
Good trading, everyone.
