You may have read the article I published last week in which I detailed the prospects for the euro. For review, click here.
In that article, I analyzed the FXE, which is an ETF that allows investors and traders to capitalize on the movement of the euro without actually having to trade the currency. Below you will see the chart from that article with the notes I had added at that time:
Quick recap: After breaking the down trending resistance labeled #1, the FXE started its 10-week rally. Then, in the first week of August, the FXE hit its down trending resistance #2. The FXE quickly turned down from that resistance and immediately broke its short-term up trending support labeled #1. This break of support sent the FXE heading towards the up trending support I have labeled as #2, which is wear the FXE had a slight bounce as expected.
At the time of the writing of that article, support #2 and resistance #2 were the levels to watch for a potential trade. Since those two levels were converging on one another, it was only a matter of time until the FXE broke out in one direction or the other. If the FXE were to break through the resistance, I would expect it to move toward higher prices. In contrast, breaking the #2 support would most likely lead to lower prices for the FXE, and in turn, the euro. Well, the verdict seems to be in:
I have cleared off all other support and resistance levels from the previous chart except the one that currently matters the most. As you can see, the FXE broke its up trending support level and has already started to move lower as would be expected. At this point, what might you expect the euro to do?
The Tale of the Tape: The FXE has broke down. When stocks/securities break support, they usually do tend to go lower. The FXE’s recent break of support provides an excellent opportunity to enter a short position.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT