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EUR/USD Stop-Hunting and Bear Trap

by Rafael Rosa on March 22, 2010

trading floor EUR/USD Stop Hunting and Bear Trap

Intraday volatility has been wild for most currency pairs today. GBP/USD suffered a sell-off only to retrace all of its losses. The Yen had a spike against all major currencies (Australian dollar, Pound, Euro, Canadian dollar, & US dollar) only to retrace most of the spike gains.

The EUR/USD also made a move down to 1.3462 just to get the sideline bears excited. The pair had been holding the 1.3500 stronghold support since last Friday. This was also the level where Goldman Sachs and CityFX had recommended their clients to place stop-losses on their 1.45 target.

After hours of suspense and anxiety, Greek Deputy Prime Minister Theodore Pangalos took the spotlight and made a few comments to disrupt the support and call in the Bears.

WSJ reports:

Speaking at a conference Monday, Pangalos said the future of the European Union is at stake and warned that if EU leaders fail to address the problem it will harm the integrity of the euro zone.

“If there is no tool, no weapon on the table…if the speculators are not worried about losing anything, then the euro has no meaning,” Pangalos said. “If that happens the goal of European unification will be set back by many decades.”

These statements combined with earlier comments from German Chancellor Angel Merkel (Bloomberg: Merkel Summit Won’t Yield Greek Aid) caused the pair to lose a leg and hit 1.3462. Most Euro bears were looking for a break below the key technical level of 1.3440.

However, the Greek problem (at its current stage) is old news and not something that will likely send the EUR/USD to new lows. It’s exactly what happened as the pair created a bear trap and rebounded beyond 1.3550.

Click on image to see full-sized graph

eurusd bear trap 2 EUR/USD Stop Hunting and Bear Trap

Overall, you either need an IMF rescue, severe widening of Greek CDS or bond yields, a US equities sell-off, or a really harsh/stupid comment from a European official to get the Euro moving below 1.3440.

Unless any of those things happen, I’m going long the EUR/USD on these dips. If real negative events happen on the Greek issue, I’m definitely willing to flip and go short too.

EUR/USD is still trading in the 1.3440-1.3820 range. Shorting at the bottom of the range without a breakout has a horrendous risk/reward ratio. Bears at these levels will go for the exits on any hint the pair gives that it may rebound. You’re better off going long and putting a stop-loss some 40-50 pips below the key technical level.

Today’s stop-hunting action created a perfect bear trap and probably burned a lot of people. Don’t let the longer-term bears consume your mind and affect your intraday trading.

Technorati Tags: bear trap, Currency Trading, currency volatility, dollar, eur/usd, euro, euro dollar, stop hunting

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Intraday Trading Review [March 23,2010] | My Investment Analysis
03.23.10 at 8:29 pm

{ 1 comment… read it below or add one }

jay 07.09.10 at 1:48 pm

in retrospect…

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