Sell That Euro!

01/12/2011 9:58 am EST

Focus: FOREX

Thomas Aspray

, Professional Trader & Analyst

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Chart Analysis: The EUR/USD has rebounded nicely from the lows made Sunday night as the markets prepare for the details of Portugal’s debt auction and anxiously await further news on increasing the euro debt fund. The daily chart of the euro FX futures shows the completion of the flag formation with last Thursday’s drop. This appears to be a classic continuation pattern, or in other words, just an interruption in the downtrend.

  • Lower highs and lower lows, consistent with daily downtrend

  • On-balance volume (OBV) weaker than prices, which is negative

  • Completion of flag formation has downside targets at 1.2500-1.2600

  • Hourly chart of EUR/USD reflects the rebound this week with first chart resistance at 1.3050

  • The 38.2% retracement resistance is at 1.3085 with the 50% resistance at 1.3150

What It Means: Some of those who sold the euro last week appeared to have closed out their positions when it failed to decline further early Monday. Markets are waiting for more news on Portugal and wondering whether Spain is next in line for a bailout. Though the euro could still get closer to the 1.3080 level, a break of Tuesday’s lows would be negative. The euro should resume its decline by the end of the week.

How to Profit: Aggressive traders could sell the cash EUR/USD at 1.3055-1.3100 with a stop at 1.3188. A more conservative approach would be to wait for a clear sign that the rally is over—such as a lower daily close—before selling the euro.

My recommendation last week to buy the PowerShares DB US Dollar Index Bullish ETF (UUP) at 22.76-22.98 was not filled, as the low was 23.12. Change that order to buy UUP between 22.98 and 23.16 with a stop at 22.30.

Tom Aspray, professional trader and analyst, serves as senior editor for The views expressed here are his own.

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