Euro Rebounds As Speculative Position Reaches Record Levels

OptionsXpress
updated | Author's Website

Wednesday, January 11, 2012

Though the major trend appears to favor Euro bears, in the short-term the market appears oversold, and a short-covering rally is not out of the question. On any rally attempt back towards near-term resistance near the 1.3085 area, some traders may perhaps wish to explore selling a March mini-Euro futures contract, with an objective of the March futures trading below the recent low of 1.2673. Some traders may wish to close out the position should the March futures close above near-term resistance at 1.3237.

Fundamentals

The Eurocurrency continues its downward spiral; with the lead month March futures trading at the lowest levels since September of 2010, as traders continue to flee the united currency due to concerns that the debt crisis will not be contained. German Chancellor Angela Merkel and French President Nicolas Sarkozy meet on Monday to discuss plans for closer fiscal union and regarding tougher sanctions for member nations who fail to control their fiscal deficits. Continued concerns that the Greek bailout plan was running into difficulties was a topic of discussion, with the IMF warning that even with private sector investors accepting a 50% haircut on the value of Greek debt, the country has an increasing risk of default, as even reduced debt levels may not be enough for the country to be able to service the debt. Speculators have become extremely negative on the Euro’s prospects, as the most recent Commitment of Traders report shows the combined speculative short positions have reached record levels. This increases the risks of those looking to go short the Euro at current price levels, as any “positive” news out of the Euro- zone may trigger a huge bout of short-covering buying, forcing prices higher despite the overall negative fundamentals.

Technical Notes

Looking at the daily continuation chart for the Eurocurrency futures, we notice prices rebounding as the market trades near the low end of the downward channel drawn from the May 2011 highs. The 14-day RSI has moved back above oversold levels, with a current reading of 32.62. Though the market appears ready for a short-covering bounce, prices have a way to go to test even the 20-day moving average (currently near the 1.2978 area). The next major resistance level is found at the December 13th high of 1.3237, with major support found at the recent low of 1.2673.

Mike Zarembski, Senior Commodity Analyst

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