Trading Forex – EUR/USD Ready for Further Downside

Posted on 20. Jan, 2012 by Jakob in Daily Outlook, Forex Signals, How To, Random Noise

Trading Forex – Market Outlook for January 20th 2012. EUR/USD has been trading higher all week long. It has surged from a low around 1.2620 on Monday to a new high today around the 1.2970 level. This is a move of more than 300 pips to the upside which without a doubt will make a lot of trades question new lows in a near future. There has been a lot of buzz that traders should now start to look for long positions on this particular pair. I think the move up we have seen this week is nothing more than a pullback due to profit taking. Since the end of October 2011, the pair has plummeted by more than 1500 pips so a pullback is only a natural reaction to such a massive move.

Trading Forex – Bias

In fact, I think we are getting a very good chance for a short trade today, and this is something I will pay attention to. My bias on EUR/USD remains and I think we will see further downside on this pair in the nearest future. This week has been fairly heavy on news releases, but we have not had any major deviations which should be trend-changing for EUR/USD in my opinion. A pullback on this pair is a natural reaction and even though the technical perspective is a mixed bag (and slightly against short positions for now) I think we are likely to see further downside on the pair. As the pair has been surging all week, tomorrow would be a good day to keep an eye out for a possible short, also due to a market cycle correction from a weekly perspective – The ones who have been long all week, might be looking to close out their positions before the weekend, which is indicative of potential downside.

Trading Forex – Fundamentals & Sentiment

The news releases so far this week has been slightly in favor of the greenback whereas the situation for the euro zone still appears worrying. Today will have Existing Home Sales from US with expectations of 4.65M compared to 4.42 previous releases – so any pre-new sentiment should be in favor of further dollar strength. During this week the German government has cut its GDP growth forecast for this year to 0.7% from the 1.0% figure projected in October and Fitch director Alessandro Settepani commented that a two-notch downgrade of Italy is possible. News like these hits the wire pretty much every single minute these days, but as for this week, I must admit that I see the move up on EUR/USD as a result of profit taking / consolidation before the next thrust down.

Trading Forex – Technical Perspective

I think we get a very clear picture of the situation from the 4-hour chart, which you can see on the picture below. We have a very clear bearish trend-line which has been broken to the upside today.

This is usually one aspect which would make me start looking for long opportunities compared to short ones. However, there is more to it than that. If we were to take a long trade based on a trend-line break, we would still wait for a pullback – just another way of saying there is still an opportunity for a short trade even if the pair doesn’t make a lower low. Another thing that comes to mind is the 200 EMA on the 4-hour chart, which is currently just about 30 pips about current market rate. Finally we have the psychological 1.3000 level is very likely to act as a strong level of resistance – this is clearly spotted from a look at the historical price action around this level.

Trading Forex – Ideas

I am currently only looking for short trades on this pair and I think the 1.3000 level or slightly higher should give us a very favorable chance for a profitable short trade. One thing to keep in mind is that we are likely to see the pair burst through the 1.3000 level and maybe reach 1.3015 – 1.303 level and then head down from there. We see this over and over again around psychological levels as retail traders tend to place their stops just above or below the level in question. So you don’t want to enter right at 1.3000 if you plan to use a very tight stop loss. I will be paying attention to price action and time of the day to plan my entry and I would look to get in around 1.3000 -1.3030 with a stop above 1.3100 and look for a minimum of 1:2 in Risk:Reward. I will be looking to enter this position right around London open or US open if price action starts to give us clues about possible downside.

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Tags: EUR/USD, Forex Signals, forex trading, Trading Forex

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