I have been short EUR/USD since about 1.50, and now that it has dropped nearly 2000 pips, I am cautiously considering my exit strategy. I see two possible scenarios, outlined in the following chart.
Scenario 1 is the ending diagonal scenario in green. This implies limited additional downside to the 1.30-1.31 zone over the next few weeks.
The second scenario, which I am currently favoring, is a break through the support trendline, continuing an extended 5th wave from 1.38. The reason I’m favoring this scenario is that retail traders have shifted to net long in hordes, after the EUR tanked due to the Greece downgrade. Sentiment is not overly bearish the EUR, nor bullish the USD, so I think it would be perfect to see price drop to slightly below 1.23 low set in 2008, before starting an extended upward correction to 1.3250 or so.
Either way, I have moved my protective stop to 1.3425. If Scenario 1 is in play, I am not missing too much downside with this stop. And if Scenario 2 unfolds, price should not rally above 1.3425.
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