U.S stocks and the euro surged today in concert after reports of German business optimism raised unexpectedly and the European Central Bank's first-ever three-year loans to banks provided relief to banks throughout the euro zone.
The expectations of the German index of business was to drop to 106.1 but instead, in an unexpected surprise, the German index of business optimism rose to 107.2 in December from November's 106.6.
Traders watched yields on the three- and six-month Spanish Treasury bills fall sharply while demand surged during Tuesday auction. According to analysts, banks are looking to tap into the ECB three-year liquidity offer that will occur on Wednesday to fund the purchase of higher-yielding Spanish bonds.
The additional liquidity will bode well for the euro as traders take the ECB action as a positive step forward. However, looking at the chart, traders are finding that today's trading range in the EUR/USD is within the daily range of the last four days, albeit on the higher end.
Price action is also sitting on the -0.18% and -0.27% Fibonacci extension levels that are natural support/resting area in the Fibonacci wave, which in turn suggests that price is only resting before heading to the -1.618% extension level.
Traders looking to sell the rally can consider entry points on break below the daily trading range of the last four days.
Those looking to buy the euro in the hopes of a continued rally can look for a break above the daily trading range from the last our days or a bullish candlestick formation.
In either case, caution is necessary as the price level within the Fibonacci wave will require protective stop orders to be so far away from the current price that the risk/reward may not be favorable for all traders.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.