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Bearish EUR/USD: Eyeing New 2016 Lows

Bearish EUR/USD: Eyeing New 2016 Lows

2016-01-11 14:20:00
Tyler Yell, CMT, Currency Strategist

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Point to Establish Short Exposure: At Market (1.0885), Due to Favorable Risk: Reward

Spot: 1.0885

Target 1: 1.0770 Weekly S1 Support

Target 2: 1.0621 Weekly S2 Support

Invalidation Level: Close above 1.0968 (YTD High)

Fundamental & Technical Focus:

The EUR has been in a precarious situation through the open of 2016 as it was in the last quarter of 2016. In short, the strength that was seen against majors like the USD, JPY, & GBP could not be trusted as rallies would not last. As of this writing, EURUSD is higher on the year by 0.52%, but what is interesting is the resistance that has become evident. After the December 3 bottle-rocket, EURUSD has failed to build any sustainable rally against the US Dollar because most of the strong moves have come for sellers exiting their positions, not necessarily new longs expecting a trend change.

On Friday, we had another impressive Non-Farm Payroll print in the United States. While the dollar did strengthen, so did the EUR, but only to resistance. As the price moved to channel resistance, the view remains cautiously bearish, which can be the best place to enter a short position because the risk: reward is so favorable. In the example of EURUSD, there is a confluence of resistance from 1.0968, the YTD-high up the 26-week moving average at 1.0004. Only a move above the 1.1000 would change the outlook from bearish to neutral.

Right now, our Trader Sentiment Indicator SSI is providing a neutral bias. This reading on SSI sits between -1.5 & +1.5, which shows us that positioning is not extreme and the market is rather open to influence from external events. The ratio of long to short positions in the EURUSD stands at -1.43, as 41% of traders are long. We would want to see a move to and through +1.5 on SSI in order to have the wind of SSI at our back. A price move above 1.1004, and SSI moving to -1.5 or deeper would further put our attention on further gains.


Bearish EUR/USD: Eyeing New 2016 Lows

One last technical note is the Bearish RSI and Channel Resistance. The RSI trendline shows lower highs, which makes the argument that the momentum on moves higher have not been sustainable. The price channel takes a line drawn off the extremes of labeled waves “1” & “3” and clones that line drawn from the top of the October ’15 move. That channel is showing that price may have run out of steam, and that is the technical bet being made in today’s analyst pick. A smaller red price channel had been drawn as well off recent extremes starting with the December 3 move. That channel also indicates we are at resistance.

Key Technical Levels:

EUR/USD – Market Pattern Favors Selling Resistance With Good Risk: Reward

Second resistance: 1.0968 YTD High

First resistance: 1.0918 1/8/16 Close

Spot: 1.0888

First support: 1.0803 Jan. 8 Low

Second support: 1.0710 YTD Closing Low

Trade Setup:

I am looking to sell EURUSD at market on the view that the large price channel will hold and momentum will soon turn lower to break below key support. A daily close below 1.0803, the January 8 Low would help validate the Trade setup and our attention would be turned to the two targets mentioned above. The protective stop will be at 1.0968, right above the recent high with a preference to move the stop to break-even when prices move in the intended direction lower. This target aligns with a favorable risk: reward ratio that our Traits of Successful Traders report found to be one of the best things a trader can do to ensure long-term sustainability in your trading.

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