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The EURUSD sold off 6.5% during the month of May creating a deeply oversold condition in the pair. Since June 1, 2012, the EURUSD has moved nearly 300 pips off its low creating an opportunity for traders to align themselves in the direction of the larger down trend. Sell at a confluence of resistance near 1.2665.
Last Friday, the FXCM’s Speculative Sentiment Index (SSI) Tidal Shift Strategy gave a buy signal indicating that sentiment had shifted enough that the potential for an upward correction was increasing. The upward price movement for the past week has relieved the oversold condition that the oscillators were showing on the EURUSD. Prices are now approaching a resistance level where we can enter back into a trade in the direction of the down trend.
(Created using FXCM’s Marketscope 2.0 charts)
There are 3 points of resistance converging near 1.2665 offering traders a shorting opportunity.
The reason I choose the 38.2% Fibonacci retracement level was because it is possible to label this strong down move in May as a wave 3 in Elliott Wave terms. That would lead to a wave 4 counter trend bounce higher.
One guideline that Elliott Wave analysis helps us out with is that wave 4 oftentimes retraces 38.2% of wave 3. Wave 4 does NOT have retrace 38.2% as it is just a guideline, but the confluence of resistance surrounding 1.2665 offers us the chance at a good risk to reward ratio.
I like to use breakouts as a means to enter trades as it forces the market to prove to me that the resistance level is likely going to hold. Therefore, I would wait for the black support line to break AFTER prices reach 1.2665 then enter a short trade.
Place your stop loss just above the swing high after a break below the black support line. This will likely be 100-150 pips.
First target is the swing low near 1.2300.
Insist on at least a 1:2 risk to reward ratio according to FXCM’s Traits of Successful Traders.
---Written by Jeremy Wagner, Lead Trading Instructor, DailyFX Education
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