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Second-Chance Short Set-up in EUR/NOK

Second-Chance Short Set-up in EUR/NOK

2014-03-07 15:34:00
Rafiul Hossain, Head Forex Trading Instructor
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Talking Points:

  • New Downtrend Clearly in Place
  • Fundamental Factors That Support the Downside
  • Potential Short Set-up in EUR/NOK

A pullback within the overall downtrend in EUR/NOK could allow existing shorts to add to their positions, or give new sellers viable opportunities to join this longer-term trend trade.

With clear negative divergence between momentum and price early in 2014, EURNOK failed to take out earlier highs just above 8.55 and has since established a new downtrend consisting of lower highs and lower lows. This indicates that the lengthy uptrend in place since 2013 is now over, and that there is a higher likelihood that the pair will trade lower as 2014 unfolds.

See original analysis: Slow-Moving Short Trade in EUR/NOK

However, as everyone knows, trends rarely, if ever, move in a straight path, and EURNOK is no exception. Currently, the pair seems to have found some support just above the 8.20 area, where buyers have stepped in.

We also have a possible short-term piercing pattern (a bullish candlestick reversal signal), which might support a decent bounce and retracement of the current decline from recent highs. If we see such a move materialize, it may offer another opportunity to sell the pair and capitalize on future downward price action.

Technical Outlook for EUR/NOK

EUR/NOK Chart

Support: 8.20, 8.00-7.95

Resistance: 8.30, 8.35, 8.40, and 8.55

As shown, the first resistance area is between 8.30 and 8.32. Next is the 50% retracement just above 8.3750, and finally, the 61.8% retracement at 8.41. To the downside, we should see some support around the 8.20 area. If this level fails to hold, however, the next zone of support does not come in until between 8.10 and 8.08 or even as far as the 8.00 handle.

Fundamental Factors Impacting EUR/NOK

Furthermore, it seems like the Norwegian krone (NOK) is running ahead of the underlying fundamentals in Norway. The next Norges Bank policy meeting is slated for March 27, but ahead of that meeting, we have February’s inflation numbers, which are due for release on March 10.

For January 2014, inflation surprised to the upside and boosted sentiment for the krone, but this is unlikely to have prevailed throughout February. Instead, it could be a cold shower, at least in the short-term, for NOK bulls.

Trade Idea for EUR/NOK

Await a possible pullback to the 50% retracement level at 8.3750 or above to 8.41, which is the 61.8% retracement. Then, using half the desired size, short EURNOK above 8.37, adding to the position if price declines from the resistance area. The stop-loss should be executed if EURNOK closes above 8.45 on a daily time frame.

The price targets for the current set-up are 8.20 and then 8.10. If the first price target is reached, protect the entry by moving the stop-loss to breakeven, or consider taking half the position off the table while moving the stop-loss on the remainder of the position to breakeven.

By Rafiul Hossain, Guest Contributor, DailyFX.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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