Currencies | Jul 12 2011
By Paul Robinson
The EURUSD since mid-May has been undergoing a congestion phase after rallying strongly since the beginning of the year. Traders, according to SSI (Speculative Sentiment Index), had been bucking the rally throughout the entire duration of it. However, late last week sentiment for the first time since the end of 2010 began making an important shift. SSI now shows 65% of market participants to be net long. This flip in trader's views is especially important considering today's breakdown out of a 2-month triangle pattern. Interestingly, during this sideways price action implied volatility has been rising and daily travel ranges have been increasing. The 3-month volatility (V3M) has risen from a low of 10.35 in April to today's reading of 13.36. An increase in volatility during sideways action is a sign of a pending move that is likely to be sizable.
The first target is the rising trend-line extending back to the 2010 low. There could be a confluence of technical levels as the 38.2% retracement level from the low of 2010 sits near the rising trend-line. With this in mind, it will be important to watch how the EURUSD reacts around this area of support – 1.3775-1.3825. The width of the triangle suggest an eventual measured move of ~1000 pips is in the cards, pointing to an intermediate-term target of 1.30-1.31, which coincides with the 61.8% retracement level from the 2010 low and is just a stone's throw away from the 2011 low – 1.2873.
The combination of a key price break and the masses now leaning long provide an excellent opportunity to get on board a potential new trend. As we are all aware of, there are plenty of catalyst out of Europe which could fuel the move lower. If a strong trend develops there should be a plethora of short-term trading opportunities to take advantage of. So stay tuned…..
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