Monday, December 17, 2007

Recent moves in the Euro

One of Pythagoruz recurring comments on this blog has to do with fast moves from failed moves, and I need to pay more attention to that. The recent head and shoulders move in EURUSD led to a breakdown in the value of the Euro that moved at a speed that surprised me. See the chart below, and click on it for a larger image. The last two candles have me shaking my head in wonder.

The Head and Shoulders formation is considered the most reliable reversal signal that exists, and while I knew that, last week I was paying more attention to the expectation of interest rate changes, inflation data, and trade deficit news.

The fact that the dollar strengthened on inflation data, after the FOMC cut rates surprised the hell out of me. Does anyone think that Bernanke and the rest of the Fed governors didn't have that inflation data in hand when they cut rates? Of course they did, and they cut interest rates anyway.

I'm not a great believer in Event Risk for long term positions, but apparently I'll have to start paying more attention to that too. The inflation data spurred the dollar bulls into a buying frame of mind, and year end profit-taking provided absolutely no support for the Euro.

So where does that leave us for possible trades in the currencies?

Well in my honest opinion, with a good buying opportunity in the Euro. The chart below is a longer term weekly chart that shows remarkable similarity over time. In particular the rising SAR meeting the value of the Euro has sparked strength in the Euro 7 times in the last two years.

Could things be different this time? Well, sure they could be but I'm not the only fan of chart similarity on this blog. I'm also fond of charts showing higher highs, and higher lows.

The timing of this SAR trigger probably couldn't be better. As the year-end positioning comes to an end this week a savvy trader could find a good entry point to the Euro currency. I would recommend FXE calls, at least three months out.

Disclosure: I own Jan FXE calls.

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