The EUR/USD has posted an impressive rally after bouncing off of support in the 1.2615 area in the middle of January. We have seen very little in the way of meaningful pullbacks and, as is generally the case, we are viewing this as a prime opportunity to enter into fresh short positions. To do this, we must identify levels of tradable resistance so that we can get in at the best possible price and improve our risk to reward ratios to increase the probability of a successful trade.
Pulling out to the daily charts, indicator readings suggest that the pair has the potential to extend further, so in this setup we are looking for areas where prices are likely to have difficulty surpassing on approach. The longer term downtrend line from the highs at 1.4920 (printed in January of last year) is our first reference point, as it extends now to within 500 points of the current price.
Next, we look at the measured move from the October 2011 highs above 1.39, which gives us a 61.8% Fibonacci retracement at 1.3615. This level was a previous breakdown point and also comes in near the 100 and 200 period EMAs on the daily charts. With the daily RSI currently showing a print near 70 and the latest rally unfolding in a corrective A-B-C pattern, we are viewing the 1.3615 as a suitable level to initiate short entries.
For trading parameters, we are viewing downside as having the potential to extend to new lows for the year, so profit targets are set just above the psychological 1.25 level at 1.2535. This parameter, however, will be changed if we see a strong bounce out of previous support at 1.2615. If this occurs, we will cover the short and close the trade. For stop losses we will set out level at 1.4225, as an upside break here will invalidate the longer term downtrend and bring in the possibility of a much larger rally on longer term time frames.
The strongest arguing points for the trade are seen with the favorable risk to reward ratios and the strong upward movement of the latest rally (without a significant corrective retracement). The confluence of technical indicators is supportive of this bias, so we will sell into these levels if given the opportunity.
Next, we will give an update on our previous trade, as our long position in the USD/JPY has spent most of the time in the money. Currently, prices are retracing back toward our entry level, but we will hold the position as the strong impulsive move on the upside break helps to validate our original position. Our strategy at this stage is to wait for prices to break to new highs above 81.50, at which point we will move the stop loss to break even. Profit targets remain the same, as this is a long term position with carry value so the risk of holding this position is minimal and is moving according to plan thus far.
Traders who are late to this trade entry can wait for a retracement back to the 38.2% Fibonacci level at 79.40, which will give an even more favorable trade entry. Trade parameters for stops and profit targets remain the same, however, and we expect the downside to be contained within this region going forward.
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