EUR/USD: Why You Should Stay Short Ahead Of A Correction
With the first signs that the eurozone is coming out of recession, it's obvious that the pair currency EUR/USD would be influenced.
The pair from is skyrocketing from the July 9 lows to a new high in the 1.34 levels. The one month recovery rally that started in July, in combination with the satisfactory results from the eurozone members, signifies that new high levels are ahead.
Moreover, in spite of hopes for recovery, the fact that the risk and the uncertainty is still in the epicenter is of paramount importance.
The German election and the rumors for a second haircut in the Greek debt will put the pair currency under severe pressure and volatility. Alongside these two scenarios, the fact that Greece may suffer from political instability in the near future does not really help the euro.
After conducting a technical analysis in the EUR/USD pair currency with very interesting results, the best option for investors to consider is staying short in the medium term.
There are six reasons to stay short in the medium term:
- The buy signal generated by the SMA shows signs of weakness,
- The stochastic indicator fluctuates around overbought levels and generates signs of a downward trend,
- There's a weak ADX,
- RoC is neutral,
- Aroon indicator highlights the upward trend's end
- Both R% and RSI generate sell signals.
Considering the graph, there are signs of buy signals, since the price is moving over the three moving averages and the SMA of 50D is moving over the SMA of 100D and 200D.
Alternatively, the fact that the smallest SMAs are moving over the biggest SMAs is a mediocre buy signal. Furthermore, what shows that the buy signal tends to be weak is the fact that the SMA of 50D is on a plateau phase. Moreover, the SMA of 50D after a strong uptrend has now entered a plateau phase that generally reveals the first signs of a downward trend.
Additionally, the SMA of 200D is moving over the 100D, which highlights the possibility that the strength of the buy signal is limited or that the strength of the upward continuation is limited. When the smaller SMAs are moving below the bigger ones then such a movement foreshadows an upward limitation.
As far as the Stochastic Oscillator is concerned, there are signs of a momentum change that will cause the trend to follow a downside path. In this graph, it's very important to analyze the relationship of %K in terms of %D.
The fact that %K reached to the level 72.67 reveals that is moving near the overbought levels. The movement of the trend to such a high levels signifies a sell signal. Moreover, the fact that %K is on its peak shows signs of downside since it intersects with the %D which means that the momentum is due to change.
However, apart from the intersection point of %K and %D as well as the overbought level, it's pivotal that the %K tends to move below %D. When %K is moving below %D it is obvious that there is a potential momentum change that will cause the trend of the pair currency to decrease.
The Rate of Change indicates the velocity of the trend is neutral. The RoC is 1.05 which indicates that the continuation of the rally might be limited with such low velocity.
If one considers the graph, one can see that during June and July the rate reaches the highest levels: -3.4 and -3.5; a sign that the velocity was strong enough. The fact that the pair currency has been skyrocketing since July does not mean the power or the strength of the rate/velocity will enable it to continue.
The graph shows that from the middle towards the end of July the rate was decreasing and that has not exceeded the level of two yet. The decreasing RoC in combination with a weak velocity underlines that the continuation of the price increase might stop.
The fact that Aroon Down (blue line) is moving over Aroon Up (green line) means that there is a downward trend ahead.
Moreover, the fact that Aroon Down tends to be close to 100 with a current value of 76.00 underlines that the downward trend is strong enough.
In a nutshell, the high value of Aroon Down as well as the fact that is moving by far over Aroon Up, signifies that the continuation of a downward trend is in the epicenter and that the rising of the price of the pair currency might decrease.
DMI - ADX
Although the +DMI is moving over the -DMI something that illustrates an upward trend, what is important is to analyze the values of the DMIs and the relationship with the ADX.
Considering the graph we see that the large gap between the +DMI and -DMI reveals that the buyers are more than the sellers, yet the trend seems to decreasing. +DMI seems to be in the peak and following a first sign of weakening path. Alternatively, +DMI has a value of 24.23 which is below 25.
With a value lower than 25, it is obvious that the weakness and the declining of the movement is ahead. Moreover, the fact that the strength of the trend as depicted by the ADX 26.09 signifies that the trend is not strong enough for continuation.
On the other hand, the significant weak +DMI as well as the fact that the ADX ( >25 = strong trend) is not significant high to establish a clear upward trend, indulges that a decline in the price is ahead.
R% - RSI
Both %R Williams and the RSI highlight the price of EUR/USD pair currency which tends to move closer to the overbought levels. The RSI value equals to 63.98 — 6.02 points less than the highest overbought level of 70.
Moreover the %R Williams is -61.95. Both indicators, underline that the price of the currency is moving aggressively towards the overbought levels and thus a potential price correction to be ahead.
Such high levels illustrate the fact that the high number of buyers might be replaced by a rising number of sellers.
In order to enter a short position in the pair currency there shall be a focus on:
- Fibonacci retracement
- Market volatility
As far as the market volatility is concerned, we can understand that that the current volatility is aggressive and significantly high. As it appears in the first graph, it seems that the Bollinger bands have a great gap between them because the price fluctuations are high.
For example, the fact that the price breaks the upper band (red circle) means that the number of buyers is extremely high as well as the fact that the price breaks the overbought level.
As a result, this underlines that a correction will take place in the near term. The breaking of the upper trend signifies that the price of the pair currency will drop.
The current ATR value is 0.00706 or 70.6 pips, with the highest ATR in the six months (January - August) to be 0.1151 or 1151 pips and the lowest 0.00683 or 68.3 pips.
As a result, a short position will be opened at:
- 1.3370 - 1.34 (the current prices)
- with immediate targets the levels 1.33317, 1.33117 and 1.33017 (Current price - Lowest ATR) respectively
- 1.3314 can be also considered as great support level since it is the 25D SMA of the Bollinger band
- 1.32322 which the 50.0% of Fibonacci can be considered as an other also immediate target
As far as the medium term is concerned, the 50D SMA which is at 1.3164 is the medium term target.
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