On the technical side, the US Dollar Bull Flag (daily chart) had held until now, with the dollar reaching a multi-month high of 80.82. However, it seems like the flag is overdone and a daily evening doji star has formed. A textbook explanation of the candlestick formation is below:
Click on images for full-sized picture
And here is the daily chart of the US dollar index:
The medium-term momentum for the US dollar is still up but it seems like a temporary top may be at hand. On the downside, there are no supports nearby (e.g. significant moving averages or Fibonacci levels). The only thing I see is the 23.6% retracement level (79.30 area) from the 74.21 low to 80.82 high.
On the short-term, the EUR/USD (which makes up 57% of the US dollar index) is at an extreme oversold zone. The number of EUR/USD futures shorts is also at a record high that dates back to 1999. As long as no additional negative data comes out from Europe, it is unlikely that the Euro will be pushed lower because most investors are already in this crowded trade.
However, don’t pile up on the long side. A negative resolution from the European conference regarding the Greek debt problems can still send the pair crushing down.
One alternative option that you could set up is a light “risky” EUR/USD long that has a tight stop. The second option involves waiting until the end of the week and seeing what the European Union decides; however, you’re likely to lose on the major market movement following the announcement. The third option, which is my preferred choice, involves maintaining open order straddles around the pair. The volatility following any announcement regarding the Greece problem will create major moves in the market (probably more than 80-100 pips instantly in the EUR/USD). I definitely don’t want to lose out.
The catch with the third option is that you’re exposing yourself to the typical forex scalping risks. If the resolution is simple (i.e. some form of bailout we’re expecting or no bailout), the movement is likely to be somewhat straight forward to one side. However, if the resolution is some convoluted complex agreement where investors can’t decipher the bottom line of the announcement instantly, the market is likely to oscillate wildly.
A good example is the last US Non-farm payrolls data point. With all the revisions and seasonal adjustments, the U.S. data was complicated and created instant price flashes to both sides north of 30-40 pips (at least with my broker). On the other side, the Australian jobs number from a few hours ago was better than expectations by a substantial amount and created an instant upward movement on the Aussie dollar with no hesitation. Overall, clear data makes scalping easy.
Putting everything together, this means that you need to find acceptable ranges to set up your limit orders if you want to scalp the ECB/European Union decision on Greece. With the EUR/USD, somewhere in the 50-70 pips zone is not a bad start. The EUR/JPY cross is much more volatile and would likely require wider ranges.
Lastly, if you’re doing a straddle, make sure you are in front of your computer screen at all times. The Greece news could come at any moment and you must be watching the price action because market movement could go wild. The key to successful scalping is to not be greedy and close the trade rather fast and then re-evaluate.
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