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Guest Commentary: A EUR/USD Short Powered by Risk Aversion

By Todd Gordon
14 March 2014 12:45 GMT

Talking Points:

  • Possible New Elliott Formation in EUR/USD
  • Broader Risk Aversion Taking Hold
  • Short Trade Idea for EUR/USD

Escalating volatility in stocks and bonds has really shaken up the forex markets as well. On Thursday, EURUSD came within a stone's throw of 1.4000, but then failed sharply in what we see as a possible fifth-wave ending diagonal pattern. These patterns are notorious for sharp trend reversals and large spikes in volatility, which are exactly the kinds of conditions that many traders dream of.

However, there is a contradictory price dynamic at work in EURUSD. As the pair was approaching 1.4000, AUDUSD was threatening a key daily breakout at around 0.9100. EURUSD fell sharply and in line with broad market risk aversion, yet AUDUSD hung in relatively well. That could be a result of the falling EURAUD cross lending some support to AUDUSD, or the US dollar (USD) rally could be a false break. If this dollar rally is just a corrective bounce, then AUDUSD should pull back to and hold the 0.9000 level.

For now, though, we'll listen to the message that the broader markets are sending and buy the US dollar in the name of risk aversion.

Short Trade Idea for EUR/USD

We would like to use a corrective bounce to establish short positions in EURUSD based on the following parameters:

  • Sell EURUSD at 1.39000
  • Set stop loss at 1.3960
  • The initial target for this trade is the 1.3800 level

By Todd Gordon, founder, TradingAnalysis.com

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Disclaimer: Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors.

14 March 2014 12:45 GMT