By James Hyerczyk
Commodity Trading Advisor
The EUR USD plummeted on Wednesday after reports said manufacturing slumped and unemployment rose to match a record high in March. German Bund futures soared to a record high of 141.69, reflecting investor concern that the slowdown would continue to sweep the Euro Zone and hit major economic centers such as France and Germany.
Economic downturns in Italy and Spain continued to send worries throughout the region while week-end elections in Greece and France created additional turmoil that weighed on the minds of traders. Investors now fear that plethora of negative news will drive the Euro through the key 1.3000 area, perhaps setting off a string of orders that could trigger an acceleration to the downside.
On Thursday the European Central Bank will meet amongst growing pressure that the central bank will be forced to use bond buying as a measure to protect the Euro nation from additional economic weakness. Talk is circulating that the ECB may even consider cutting its benchmark interest rate soon. This action would weaken the Euro further as it would remove the region’s interest rate differential advantage. Even if the central bank leaves interest rates unchanged, ECB President Draghi’s post-meeting news conference will be watched carefully for signs of additional decisive actions.
Technically, the EUR USD reached the apex of a triangle formation and plunged to the downside. The triangle chart pattern is a non-trending pattern and often indicates impending volatility especially as it nears the apex of the pattern. This pattern didn’t disappoint as bids were pulled under support and the market broke sharply.
Solid downtrending Gann angle resistance handled every attempt to breakout to the upside this week, causing bullish traders to give up, exposing the market to heavy selling pressure. Once the last breakout attempt failed on Tuesday and the market made a closing price reversal top, all that was left to hold the Euro was an uptrending Gann angle at 1.3234.
Once the bids were pulled and the sellers took control, the daily chart pattern indicated that there was nothing to stop the break until it reached a retracement zone or another uptrending Gann angle. Based on the short-term range of 1.2994 to 1.3283, a retracement zone was created at 1.3138 to 1.3104. The upper target or 50% level was tested this morning, producing a technical bounce, but nothing to indicate major buying was taking place. In fact, it appeared to be more of a profit-taking bounce rather than fresh buying.
Further downside pressure today could trigger a test of the uptrending Gann angle at 1.3114 or the Fibonacci price level at 1.31043. Since the main trend is up on the daily chart, a bottom could form in this area, but it would be better if a support base formed first since the height of the rally is often equal to the length of the base. A spike bottom tends to be met with renewed selling pressure after a short retracement to the upside.
If you missed the move, be patient for the next one to develop. Watch the trading action inside of the retracement zone for a large bid to appear. If big money likes this zone then they will provide the support for the next rally. Bearish traders may choose to wait for a retracement of Wednesday’s break rather than selling into the retracement zone support. This will mean allowing the Euro to retrace back up into the 1.3202 to 1.3221 before considering a counter-trend shorting opportunity.
In summary, news of the economic slowdown in the Euro Zone was enough to encourage long traders to bailout of their positions, but since the single currency was able to find some light support in a retracement zone, it appears to be an orderly sell-off. This likely means we may be looking at a possible “dead-cat bounce” before shorting pressure resumes.
After a prolonged rally in terms of price and time, the first move is generally long-liquidation followed by a quick retracement to the upside. The retracement rally is what attracts the new short traders. If the EUR USD forms a secondary higher top over the next day or two then bearish traders will try to pressure it lower through the 1.3100 then eventually 1.3000. So far the break can only be defined as a “normal correction”; however, traders should note the speed at which this market could fall if bad news continues to be the momentum driver. Thursday’s ECB meeting could be the catalyst behind the next move.