Tuesday, March 24, 2009

Euro turning back from .382 retracement level

Euro-usd facing resistance at the .382 retracement level

The above is the daily chart of the Euro-US Dollar (eur/usd), the most traded currency in the world.
I have marked on the charts Fibonacci retracement levels of the whole move from 1.6038 top in July 2008 and the 1.2330 bottom in Oct 2008. As you can see, after the big rally over the past couple of weeks price action has been facing good amount of resistance at the .382 retracement level of around 1.3740. Infact over the past 3 days, while the overall markets and equities have been rallying the currency pair has tested this level thrice and gone back (seen better on the 4 hour charts).

Now it seems set to move down from here and give back some of its heavy gains over the coming days. One can take short positions here with stops of 80 pips above the line. The risk reward is excellent at present, with a potential risk of 80 pips, the gain can be as much as 400 pips at the minimum. Generally professional traders look to take trades with risk:reward ratios of 2:1 or above, 5:1 is awesome.\

What also gives one confidence to take the trade is the RSI indicator. It will quite probably close below the level of 70 today, giving a sell signal after reaching overbought zone a couple of days back. Last time this happened, we had very good downside ensuing (both marked out in chart below).

But I am not suggesting that this too we shall see a major downside. Rather, my sense is that this
round of gains is not over as yet. The market needs to take a breather, give back some of its gains, consolidate and it should be ready to continue the up move again.