Last week the Euro turned down on the daily chart when the market took out the previous main bottom at 1.4157. Since it occurred such a long distance from the recent top at 1.4940 and inside of a key retracement zone at 1.4184 to 1.4006, it is possible that the single currency is short-term oversold despite the downtrend.
Overnight in the Asian market, the U.S. Dollar strengthened against the Euro ahead of a meeting of European finance bigwigs where the Euro Zone‘s sovereign debt problems were supposed to be the main topic of discussion. Potential problems with the meeting arose, however, over the week-end when it was reported that the chief of the International Monetary Fund was arrested in New York.
Following the arrest of Dominique Strauss-Kahn, managing director of the IMF, traders were worried that late Monday’s meeting would be canceled, thereby postponing such major issues as a Portuguese bailout, loan adjustments for Ireland and another possible bailout for Greece.
As the news broke, worries that the arrest incident would lead to the resignation of Strauss-Kahn spread throughout the Forex markets as traders priced in the possibility that Europe‘s debt concerns would have to take a backseat to the new developments.
Although an agreement to bailout Greece has dominated the headlines recently, there is now some speculation that the IMF will not even consider another bailout proposal until after the European Union and the IMF have completed their assessments of the lingering debt issues. New reports are surfacing that both major bodies will be ready sometime by the end of the month. Until then, although Greece will remain an important member of the Euro Zone, its impact on the Euro is likely to be minimized unless some unexpected development or a more serious threat to pull out of the Euro Zone surfaces.
Technically, as mentioned earlier, the main trend is now done in the Euro. Based on how it got there and where it is trading at this time, it doesn’t necessarily mean fresh selling pressure is likely to hit the market. Although a swing bottom was taken out last week, it is likely that stops were hit rather than new shorts added at current levels.
If the change in trend had occurred earlier or closer to the top then the market would’ve had the time and space to trigger a more prolonged move down. Since the change in trend occurred inside of a major retracement zone at 1.4184 to 1.4006, it is possible that the market is setting up a bear trap. This is typically how it occurs and the conditions are ripe for such a move to take place.
So while the trend may be down, bearish traders have to be careful about establishing new short positions or adding to already established short positions. The first phase may already be taking place this morning because it looks as if the selling pressure has dried up. This has allowed the Euro to fight back to unchanged. A higher close will be the final sign that the bear trap has been sprung. Once this closing price reversal is formed, traders can look for a sizeable retracement to the upside before fresh selling pressure takes over.
For this move to develop, however, the Euro will have to overcome downtrending Gann resistance at 1.4300 today. This steep angle moves down .008 points per day. Once this angle is cleared, the Euro will have a clean shot at a 50% retracement to 1.4494.
