Contrarian Mode: 3 Reasons to Buy EUR/USD

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.

The interesting thing is that if you do take a contrarian view, each of these types of analysis will provide you with a potential reason to start accumulating a long EUR/USD position.

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!

With EUR/USD now finding support, could we see a similar rally at the start of 2012? It’s possible, but we’ll probably have to wait for more signs that the euro is on its way back top.

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.

On top of that, they are also thinking about boosting the combined EFSF and ESM funds. If that doesn’t show that they’re dead serious about avoiding another debt crisis, I don’t know what will!

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:

EUR/USD and EUR Short Positions

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.

2 comments

  1. MMTrader

    Love your point of view. However, I would like to hear about what time frame you are thinking. Short term, yes I would say we could possibly have a small rally. Long term, hmm, maybe once they have some things figured out. Med term, I dont see this going anywhere but down…back to the 1.26 range by mid to late 2012.

    Reply

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