The Euro Cannot Go Straight Down-- Can It?
Fundamentals
The steep sell-off in the Eurocurrency that began back in early December 2009 looks to have stalled, at least for now, as it appears that European finance ministers have come up with a plan to help Greece out of its financial quagmire should its current plan to reduce its account deficits not be sufficient. The plan is expected to involve the use of emergency loans, if necessary, although the exact details have not been released. This news has assured traders that the European Union members will come to Greece's aid if needed. This takes one of the main catalysts for the Euro's decline off the table, at least for now, and may trigger additional Euro buying as speculators begin to cover their short positions in the currency. Adding additional support for the Euro was a "better than anticipated" German ZEW confidence index this month, coming in at 44.5, vs. 43.5 anticipated by analysts before the figure was released. Even though the German confidence figure was better than expected, the index still fell for the sixth consecutive month, showing that any improvement in the German economic outlook will not come easily. One of the biggest potential movers in the Euro might be the very large short positions being held by speculators. The most recent Commitment of Traders report shows large non-commercial traders short 73,213 contracts as of March 9th. Although this is down 11,587 contracts for the week, this is still a large short position being held that could be vulnerable to further short-covering buying should chart resistance points be taken-out. This is especially true given the speed and size of the Euro's decline, and a technical correction seems to be overdue.
Trading Ideas
Although in this author's opinion, the longer-term trend for the Euro is still pointing down, the 1700 pip decline in the currency without a meaningful correction has put the market in a technically oversold position. In addition, the daily chart is starting to show a rounded-bottom formation forming, which could be signaling a short-term bottom is in place. One way to react to a potential short-term bottom in the Euro could be to consider selling puts in April Eurocurrency with strike prices below the recent lows of 1.3433. An example of this trade would be selling the April Eurocurrency 1.3350 puts. With the June futures trading at 1.3759 as of this writing, the puts could be sold for about 0.0024, or $300 per option, not including commissions. The premium received would be the maximum potential profit on the trade and would occur should the June Eurocurrency be trading above 1.3350 at option expiration on April 9th. Given the potential risk involved in selling naked options, traders should have an exit plan in place should the trade move against them. One such plan would close-out the trade before expiration should the June Eurocurrency close below support at 1.3433.
Technicals
Looking at the daily continuation chart for the Eurocurrency, we notice a rounded-bottom pattern forming, which can be viewed as a possible reversal signal. Also, the downtrend line drawn from the December highs has been broken, which could spark further short-covering buying by technical traders. The 14-day RSI has turned up, moving above the 50 mark, with a current reading of 53.14. Should the recent lows hold, the next resistance point is not seen until the February 3rd highs at 1.4026. Support is found at the March 2nd lows of 1.3433.
Mike Zarembski , Senior Commodity Analyst
