One Way to Short the Euro

Traders have been chopped to pieces trying to trade the euro recently. It’s been up, down… up, down… and up again… all the while failing to develop a meaningful or lasting trend.

The spot EUR/USD rate is up 6% over the past 12 months. But it’s down 6% over the past 24 months.

With no clear patternrns or trends on the daily EUR/USD chart, it’s time to zoom out a bit for the broader picture.

Here’s a long-term chart, where each candle represents a full month’s worth of trading.

Click here to view larger

After peaking in early 2008, the euro has traded in a descending triangle patternrn. This means lower highs (red circles) – showing progressively weaker bull runs – and horizontal support at 1.2000 (blue line).

While this patternrn doesn’t tell us which way the euro will trade next, it is helpful in allowing us to plot out potential moves. This way, we’ll be prepared for anything.

Right now, the euro is in a short-term uptrend. But I expect this rally to lose stream soon, when it meets overhead resistance between 1.36 and 1.37. This is where three important levels converge:

1) The most recent high, made in February, of 1.3710;

2) The downward-sloping resistance line of the descending triangle patternrn; and

3) The Relative Strength Index (RSI) will be near 60, the level which has acted as resistance on recent rallies (red circles).

If you’re a euro bear, like me, getting short the EUR/USD between 1.36 and 1.37 is a good tactical entry point. I recommend a tight stop loss order, depending on your risk tolerance, between 1.38 and 1.40. This limits your potential risk to 400 pips, at the most.

The profit potential is much greater. A drop to just 1.20 – the horizontal support level of the triangle patternrn – gives a potential profit of at least 1,600 pips.

That’s a risk-to-reward ratio of at least four-to-one. I’ll take that any day of the week.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.