Wednesday, December 01, 2010
Pivotal Moment for EURUSD, The Dollar, The Euro, and U.S. Equities Possibly
I am going to make this post short as I have a ton of things to do today, but I think it is important to comment on the $EURUSD. Though the day is not over, the crude daily�momentum is turning bullish on the EURUSD, possibly because the initial scare of the Ireland bailout has passed for now (though, as one has read if one is paying attention, Spain and Italy are next in line).� Let's look at the daily chart.
Key points: Major support on the $EURUSD is 1.2919. So far, the lowest low of this most recent correction is 1.2971. Since the open in Europe, we have breached 1.3100.� What one must realize is the following (let's look at other daily�charts to explain what could happen in EITHER direction):
1) The symmetry of the XABCD pattern, particularly around the ABCD pattern is solid AND we have four confluence zones hitting around that 1.2971 low. That is a very bullish pattern for the EURUSD.
2) IF that 1.2971 support holds, then the next new daily target should be at least previous support (now resistance) at 1.3447. The 0.618 retracement at 1.3473 would be the main Fibonacci retracement target.
3) IF 1.2971 FAILS (and folks, it could, as the news flow is about as wacky as it gets these days with all the problems in the Eurozone), the next target low would likely be around 1.2750, and the extended low would be around 1.2466.
If the�scenario in point 2 happens, we will likely see a strong reflex bull rally in U. S. equities. Anything that is perceived as helping U.S. multinational companies to keep their exports cheap in foreign markets (as would be the case with a weakened dollar), traders and institutions will once again buy on the dip and drive prices higher.
If scenario 3 happens, we would see large cap U.S. equities continue to sink. Anything that makes the U.S. dollar look stronger (like bankrupt�members of the European Union), the U.S. dollar in the Federal Reserve garbage bin will be deemed superior to the Euro in the European Central Bank garbage bin.
Right now, Fibonacci patterns favor the bulls, but remember we are seeing unprecedented concerns about sovereign debt worldwide. This debt contagion will play out like a really bad soap opera, and since traders get as emotional as addicted viewers to soap operas, the volatility is probably going to increase. Be ready for that by limiting position sizes and using stops. Do not move stops at a whim either. Make sure you have volatility stops (based on something like an average true range criteria) to allow the trades to breathe. Volatility is a trader’s friend, but ONLY if it is managed.
As I see things, I will report on them. Thanks to all who have been patient with this transition with The Buffalo Trader blog. I am not disappearing, but I am trying to keep this blog compliant, educational, and helpful to traders. It will be at least mid-December before I can get clear on how to drive this ship. The captain, however, is not letting go of the wheel!
