Depending on how you view the euro, you either see it as a glass half-empty or glass half-full. I’m sure most of you have read tons of stuff as to why the euro is going down the drain, so here’s a CONTRARIAN view on EUR/USD.
Remember that stool from the School of Pipsology? No, not the one where you’d sit on whenever you’d move your stop loss! I’m talking about the magical stool of market analysis! Remember, we have to take a look at all three types of analysis – technical, fundamental, and sentimental – before we can establish a solid, coherent view.
1.Technical Analysis: EUR/USD Consolidating at Major Level
Remember that post I made awhile comparing price action on EUR/USD last year to this year? Well, after breaking down a bit from November’s lows, EUR/USD is now starting to consolidate just above the 1.3000 handle… right where it bottomed out late last year!
2. Fundamental Outlook: EU Summit Developments
Much has been said about the disappointing outcome of the EU summit, but there are still some reasons to be hopeful for the euro zone in the coming months. Although the European leaders didn’t come up with an immediate fix to the region’s debt woes, they did agree to make sweeping reforms that could improve the fiscal stability of the member countries.
Another ray of hope was the leaders’ decision to release the ESM bailout funds earlier than originally planned. Recall that they agreed to have the 500 billion EUR fund replace the EFSF as early as July next year instead of waiting for 2013.
3. Market Sentiment: EUR shorts at all-time highs
If you’re into picking tops and bottoms, the Commitment of Traders report is an excellent resource that can help pinpoint when the markets are about to turn. Lately, the COT report revealed that EUR shorts are at all-time highs, suggesting that we could be seeing a market bottom and that bigger market players might start switching positions.
Take a look at this chart from TimingCharts.com:
As you can see, when EUR net short positions topped in mid-2010, the euro found a market bottom then traded higher for the next few months. This time around, EUR net short positions are at higher levels, hinting that the euro could be bottoming out again.
There you have it folks – three reasons why you might wanna consider going long on EUR/USD! Just remember that nothing is for certain and for all we know, EUR/USD could be headed all the way down to parity! If there’s one thing I do know about the markets, it is very tricky and anything, and I mean ANYTHING, can happen!
Remember, while we might not have any control over how price action develops, what we do have control over is our risk management! That’s why it’s important to always keep your risk in check. No one trade is worth betting the farm on.