EUR/USD Climax?

I think the EUR/USD may have just experienced its climax top. The pair rallied over 170 pips because a top Chinese official alluded to the possibility of diversification out of dollars. The problem is that the rally was purely speculative. Would China realistically diversify out of its dollars when the dollar is at an all-time low? That doesn’t seem likely to me because central banks like to sell on rallies. If anything, China will wait for the dollar to appreciate a little first, so selling the EUR/USD (buying USD) into this irrational rally seems logical.

There are several other reasons why the EUR/USD may have topped. First, the reversal from the 1.4729 top was nearly as strong as the rally up. In fact, the decline occurred in 5-waves, and was followed by a 3-wave correction (see chart). Furthermore, there are hammer reversal candles on the Daily, 8-hour, and 4-hour charts.

Second, the FXCM SSI indicator again shows a decrease in net shorts, even though price raced up 170 pips. Clearly many speculators were stopped out of their shorts, and now longs are piling in to take advantage of the “trend” or dollar weakness, which should “certainly” be exacerbated by China’s selling. Well, since the retail traders are usually wrong, perhaps now that they are rushing in to go long, the market will stop rising.

My strategy is to short the EUR/USD around 1.4645 with a tight stop (just above WaveC). The trend is still strong, so I am not going to risk very much on this trade.