Eurozone uncertainty and the potential implosion of the euro is reflected in the volatility of the euro-dollar chart. It’s useful to step back from the raging volatility of daily trading and look at the bigger picture using a weekly chart. This helps to put the daily price activity into a broader context. The picture may remain confused and chaotic but there is usually a broader perspective of the context of the daily price activity.
The most important feature on the euro-dollar chart is the down sloping trend line starting from the May high at $1.49. The failure of the rally in September and again in October provided the three anchor points to confirm the position of this downtrend line.
This has three effects. First it helps to establish the trend and provides the limits for potential rallies in the future. Second the three anchor points define a strong and established trend.
Third the line is used to tell traders when the downtrend has ended and a new uptrend commenced. A close above the downtrend line is significant because the downtrend line has been confirmed with three anchor points.
The general direction is down so the next question is to determine to potential downside limits. These limits, or downside targets, are provided by the historical support and resistance levels. The level near $1.37 is weak and has already been broken twice on the downside. The stronger support level is near $1.29. This is the upper edge of a broad consolidation band that stretches between $1.24 and $1.29.
The continued reaction retreats away from the downtrend line suggest a steady move towards testing support near $1.29. This is the initial downside target.
Within these parameters the volatility of the trend behaviors remains high with very fast rally and retreat behavior. Traders need to hop quickly between long and short positions as rallies develop and collapse quickly. This is hop-scotch hedging. Even though the broad trend is down, it requires good agility to remain profitable in this type of market. It provides significant challenges to traders who are hedging currency exposure.
The volatility inside this trend behavior means changes of 0.10 can develop within two to three weeks. Rebound rallies of 0.10 can develop just as quickly. Getting the direction of the trend is one step, trading the volatility within that trend direction is much more difficult.
Traders look first for stabilization of the downtrend with strong support near $1.29, or consolidation support between $1.14 and $1.29. Until there is a weekly close above the value of the downtrend line, then every rise is treated as a rally rather than a trend change.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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