10/31/2007

EUR/USD Short Opportunity




A short term opportunity exists to sell the EUR/USD. There are several indicators supporting lower prices: 1) MACD divergence; 2) SSI longs are increasing with higher prices; 3) Elliot Wave counts; and 4) fundamentally sound economic data.

Today’s GDP and ADP employment reports both came in higher than expected, which should be dollar bullish. However, the interest rate cut that came later in the day led to further dollar selling. I believe that since the cut was already fully priced in, the rally in the EUR/USD was simply due to momentum, and is due for a correction.

Clear MACD divergence leads me to believe lower prices are in store. Also, the SSI index, a sentiment index of retail speculators provided by FXCM, is showing more long positions being established as the market rises. Since retail traders are usually wrong, especially in the Forex, the SSI must be used as a contrarian indicator. Finally, the elliot wave count points to at least a short term correction.

My strategy is to enter short around 1.4465 (since MACD divergence has been confirmed on the 4-hour and 2-hour time frames). My stop will be above the recent high, and my initial target will be near 1.4370, the 38.2% fibo retracement of 1.4125-->1.4503, as well as the Wave4 low. I may stay in longer if the downside move is impulsive (in 5-waves).

On a side note, here's an interesting curiosity I noticed as well. The price action in the EUR/USD over the past few days nearly exactly mirrors the price action for the SPX from Feb. 2007 thru July 2007. Perhaps if this mirroring continues, a significant EUR/USD decline is in store, on the short term at least???


1 comment:

Dr. Claude Windenberger said...

So far I can't see a flaw in the analysis, but i am far from being an expert, so let's see what happens in reality. Keep up the good work. I am planning to send some traffic to this blog.
Dr Claude Windenberger