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Shorting the Euro as Daily Volume Breaks Two-Month Highs

Shorting the Euro as Daily Volume Breaks Two-Month Highs

2014-08-28 03:00:00
Rob Pasche, Forex Trading Instructor

Talking Points:

  • EUR/USD Continues to Break Psych/Fib Levels
  • Daily Volume Reaches Two-Month Highs as Euro Moves Lower
  • 1.3200 Resisting EURUSD Advances on Short-Term Charts

Approximately 3 weeks ago, we took a look at sentiment on the EURUSD, and speculated on how that could affect where the pair was headed. Because retail sentiment was so bullish (SSI @ +2), that pointed towards potential EUR/USD declines. The Euro is now 150+ pips lower than it was after that article was published, and today I wanted to update readers on what the EUR/USD has been up to lately.

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EUR/USD Continues to Break Key Levels

The Euro has continued to fall and has surpassed two major support levels mentioned in my previous report. It barreled through the 1.3300 psychological level and has recently broken the 100% Fibonacci Expansion located conveniently near 1.3200. Either of these levels could have acted as profit targets for short positions if we were wanting to take some profit off the table.

The chart below shows a longer term Weekly chart that tracks how far the Euro has fallen from its peak of 1.3993. The next two support levels could be 1.3100, 1.3000, and around 1.2900. Using these support levels as profit targets might be a good idea.

Learn Forex: EURUSD Weekly Chart Shows Bearish Price Moves

Shorting the Euro as Daily Volume Breaks Two-Month Highs

(Created using FXCM’s Marketscope 2.0 Charting Package)

EURUSD Daily Volume Increasing, Highest in Two-Months

Another interesting piece of analysis regarding the EUR/USD is its recent increase in trading volume. Daily volume has been on the rise since early July and yesterday reached its highest daily volume we've seen in the last two months. Real Trading Volume is something that FXCM has recently made available through a free add-on at FXCMApps.com. You can download this new indicator by clicking here which will automatically install the indicator on the Trading Station Desktop platform.

Learn Forex: EURUSD Volume Continues to Increase as Price Declines

Shorting the Euro as Daily Volume Breaks Two-Month Highs

(Real Volume Indicator Available for Free on FXCMApps.com)

Volume is seldom used to analyze the FX market because the market is decentralized. There is no central exchange where all Forex volume can be calculated. So FXCM has created their own trading volume indicator that is based solely on FXCM's traders' volume. While this won't tell us how much currency is being traded worldwide across all brokers, banks, and liquidity providers, it can tell us on a relative basis if we are seeing higher or lower amounts of volume than usual.

Basic analysis looks at volume as a confirmation indicator, where higher amounts of volume coinciding with a move validates the move's strength and lower amounts of volume coinciding with a move tells us the move could be short lived. In other words, we want to take note of moves occurring during higher amounts of volume. In the case of the recent EUR/USD decline, its coincided with increasing volume on a week by week basis. This downward move has had a lot of participation and could continue.

Several 1.3200 Tests Have Failed So Far, a Bearish Signal

Next, I'd like to turn our attention to a shorter term chart. For those that follow my articles and webinars, you know that I typically use longer term charts (H4 & D1), but there can be value in drilling down to smaller time frames to see if anything sticks out.

Below is a 2-Hour (H2) chart on the EUR/USD. I have marked several times where a retracement was stalled by a potential resistance area just above 1.3200. This means that the Euro bulls are having a difficult time trying to push the EUR/USD above this level, a potential bearish signal.

Learn Forex: EURUSD Fails to Break Above Resistance

Shorting the Euro as Daily Volume Breaks Two-Month Highs

Understand that support and resistance levels on these smaller time frames are not as reliable as support and resistance levels on bigger time frames, but the 5 consecutive bounces we can see on the chart above were too noticeable for me not to mention. It may actually be an area where traders that missed the majority of this Euro move have a chance to jump in with a stop loss set above 1.3300. Make sure to take our Free Course on Money Management if you are uncomfortable creating a proper exit strategy with this type of trade.

Is the Euro Down For the Count?

No one knows with certainty if the EUR/USD will continue to move lower or not. We can only rely on our past experience of how price has behaved in similar situations. With the EUR/USD breaking such significant levels with increasing trading volume and showing difficulty in breaking short term resistance, an argument can be made that the Euro could fall even lower. To trade the EURUSD risk-free, download a Free Forex Demo account with real time charts.

Good trading!

---Written by Rob Pasche

To contact Rob, email rpasche@dailyfx.com.

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