Trend traders have been going through a very frustrating time, that’s for sure! Especially traders who focus on the major currency pairs. Some pairs have been trading sideways for many months now. The EUR/USD, which is the most traded currency pair, is one of them. Let’s look at a few charts.
EUR/USD Weekly Chart
Although there have been some grand impulsive moves in this range, neither the bulls nor the bears have been able to break out of it, except for a few false breaks, of course. This is quite a large range, and traders who have played it have had quite extended moves to take advantage of. The width of this range is roughly 700 pips. Before this range came into play, there was a massive selloff in the Euro which lasted about 10 months. This was great trading and sellers made some very easy profits by simply opening trades, and keeping them open. Stop losses could simply have been trailed loosely to lock in the gains. We’re talking about a decline of more than 3500 pips. Unbelievable! What makes this decline so marvelous, is that the structure of the trend was pretty non-volatile, with basically no large corrections that were experienced. This obviously excludes the final correction where the pair bottomed out eventually. So the trend traders made some handsome profits there.
If you asked me how to trade the EUR/USD now, I recommend playing the range until it breaks. I would be careful with short trades, but if the right opportunity presented itself, I would even play the short side here. The reason I’m not too excited about shorting this pair is that the support that stepped in earlier this year looks like rock solid support to me. Look at the following chart:
EUR/USD Weekly chart
Of course, this support could be broken quickly, but for now, it seems like the path of least resistance might be towards the upside. Retail sentiment (of traders) which is used as a contrarian indicator also suggests that perhaps there might be some scope for the exchange rate to keep on rising. This reading is currently at negative 1.5, which means that there are more retail traders that are short, than the ones who are long. For every long trader, there are 1.5 traders that are short. So the majority of retail traders are short this pair. Retail traders as a whole have historically been wrong most of the time when it comes to trading in the right direction. They like to pick tops and bottoms and are often ‘fighters of the trend’ which habit can quickly ruin a trader.
In the chart above you can see that there were three instances where the price tried to break below the 1.05 level. All three of these attempts were futile, and at every attempt, there was a subsequent bounce right after the low was formed. Although the pair has been ranging for so long, the formation of higher lows is taking place which could be considered to be a bullish development.
USD/CAD Daily Chart
The same can be said of the USD/CAD. Here we notice that the swing lows have progressively become higher and that some serious support has stepped in. A high hurdle that the pair would have to overcome first before it could gain more ground, is the 200-day moving average (the black moving average on the chart above). A clear break above the 200-day moving average could quickly snowball into a much larger bounce which could cause a mighty short squeeze in the pair. Traders who have shorted this pair during its recent strong decline would be forced to liquidate their short positions as the upward momentum might start to force them out of these short positions. Some will get margin calls while others will have their stop losses hit. This could be an opportunity for us to make some profits by playing the long side of this pair. I would like to see this pair break convincingly through the July 27th swing high first, though. This would be an indication that the buyers have conquered the range, and that more upside could be expected.
Tomorrow is a quiet day in terms of news releases. The most important event to watch is the US Core CPI numbers which will be released at 12:30 GMT.
Tomorrow there are holidays in China, South Korea, and in Hong Kong. This could affect market participation somewhat as we move into the weekend.
Have a profitable day!