I think you should fade rallies as they occur, at the first signs of exhaustion.
The euro rallied a bit on Friday as we continue to dance around the 1.06 level. The 1.06 level has been a significant amount of resistance multiple times, and it’s likely that we will continue to see sellers every time we get close there. Ultimately, I’m looking for signs of exhaustion that I can jump on, and we could go looking to reach down to the 1.05 level.
If we break down below the 1.05 level, then the market could go to the 1.04 level. The 50-day EMA sits just above, showing signs of technical resistance, especially near the 1.0650 level. This is a market that I think given enough time will continue to try to break down below the 1.04 level. If we break down below the 1.04 level, then it opens up the possibility of a move down to the 1.02 level, followed by the period level.
The ECB has a serious problem on its hands, and that is in the form of Italian bonds. If bonds continue to spite, governments run into trouble, and the ECB can only tighten so much. They have suggested that there are a couple of quarter-point interest rate hikes coming, but that pales in comparison to what we’re going to see coming out of the Federal Reserve. In other words, it does make sense that this pair continues to draw from here. The market has been rather choppy over the last six or seven days, and at this point, I think it is only a matter of time before we get an impulsive candlestick that we can trade.
It’s not until we break above the 1.08 level that I would consider this market changing its attitude, and even then I think you have a lot of concerns. I think you should fade rallies as they occur, at the first signs of exhaustion. Ultimately, the markets continue to see more downward pressure than anything else, but the double bottom underneath could be a significant amount of support and it might be difficult to get below it. Because of this, keep in mind that the market will continue to be one in which you need to be careful with your position size, but once we blow through the bottom, it’s likely that we will go much lower and in an aggressive manner.