How to Trade Overbought EUR/USD

03/29/2011 4:00 am EST

Focus: FOREX

The resilient EUR/USD pair is correcting amid the latest debt concerns, but technical indicators show that a possible short-term long entry opportunity may lie ahead. Here are the key levels to watch.

The euro has been fairly resilient in the face of significant negative news events surrounding the failure to reach a bailout agreement for Portugal and the subsequent ratings downgrades. The pullback in the value of the EUR/USD is only natural, but the lack of a major decline shows a strong trend. As such, traders may find a short-term trade set-up with a rebound in momentum.

Last week’s failure to take out the 1.4280 resistance does not bode well for the EUR/USD in the short term. Significant resistance now lies at 1.4250 off of the falling trend from the 2008 and 2009 highs. A move above this resistance would spur further buying to the 1.4580 level.

chart
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Last week, the pair also reached a high of 1.4247 before falling to a low of 1.4020 during Monday’s Japanese session. However, the declines were limited to roughly two cents. The market’s muted reaction to the negative news should be taken as a positive for the euro.

Traders may look to enter long on the pair following an exhaustion of the correction. One signal may be a rebound in the slow stochastic bouncing off of or near the 20 level.

Currently, the weekly chart shows the stochastics are in an overbought state, which may signal a further decline in the pair. A move below 1.4020, a level that coincides with the 20-day moving average, could send the pair lower to the trend line that rises off of the January 2010 lows. A sharp decline could take the pair to its next support level at 1.3860 where a breadth of stop loss orders may be found.

By Russell Glaser of ForexYard.com

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