As We Commemorate The 10th Anniversary of 9/11/2001, Are We Witnessing The Collapse of the First Currency Tower (The Euro)?

I will not use this blog to commemorate the horrible things that happened 10 years ago tomorrow (9/11/2001), but I would like to you read these two articles located here (the one written by my friend Joe Donohue, Upsidetrader), and this one from the New York Times (make sure to watch the video). Remember never to take a single moment of your life for granted. Thank God that you live in the United States of America (assuming you are a citizen reading this blog post). If you see a U.S. military veteran or active duty soldier, that that person for their service. If you see a first responder, do exactly the same thing. Lets not forget.

It has been awhile since I wrote anything substantial about the foreign exchange market, so I thought it might be appropriate at this moment to discuss the Euro and the current crisis that seems to be facing the European Central Bank (ECB) and the Eurozone in general with regard to the potential ultimate default of Greece on its sovereign debt. I will approach this for now from the monthly chart perspective (where one can see the clear areas of support and resistance).

The last time I wrote about the Euro, this same crisis was going on in Greece, and there were grave concerns about the ability of the European Union to restructure Greek debt. Despite assurances from the Greek Prime Minister, there is growing fear that Greece will eventually not fully restructure and be forced to leave the European Union. As one can see from Axel Merk, currency fund managers are also deciding to sell the Euro and buy yen and invest in Australia. The fact of the matter is, most traders are now selling Euros until they can sense the full extent of how the ECB will cut interest rates and how individual countries will restructure their debt.

Does this mean that the Euro is in imminent risk of a near-term collapse? At present, no, but what it could mean is extreme pressure and volatility in the EURUSD (the Euro/U.S. Dollar forex pair). Today, instead of getting wrapped around the axle with a bunch of pattern analysis (and it could get a bit gruesome, for those of you still awake after reading it). I am going to talk in terms of general areas of confluence (where Fibonacci levels measured from different highs and lows tend to converge). Sadly, since Ensign software has changed to an enhanced version of its analytical software, the folks there have temporarily suspended my password during the conversion period (which stinks), so I cannot show you the multiple levels of convergence. I can demonstrate how that works though, and I will do so in the following chart.

What is important is to measure the extension of the line A1 to A2 (low of October 2005 to high of July 2008), Line B1 to B2 ( high of July 2008 to November 2010) and C1 to C2 (high of December 2009 to low of June 2010). The 1.618 extensions (which are 161.8 % as long as each of those lines) can create significant areas of support in the future. One thing I also added was the retracement values of A1 to A2 and C1 and C2 to show where confluence areas exist in any price movement that could occur between those lines. Those too could be areas of support or resistance during future price action. When one does that, one notices on a monthly chart that the key areas of confluence that could become support are at the 1.3475 to 1.3130 area, the 1.188 to 1.163 area, and the 1.004 to 0.9870 area ( an area very near currency parity).

Why do these areas matter? Anyone familiar with Fibonacci pattern theory or with Elliott Wave Theory knows that in fast markets (markets in which price ranges change quickly), these confluence areas can be VERY strong in both directions, short (down) or long (up). As policy makers flap their jaws, traders will continue to influence direction ( for now, bearish direction) until some real policy decisions are made to eliminate the weaker partners in the European Union. It is this kind of uncertainty that forces currency, hedge fund, and investment fund traders to make decisions like favoring Japanese Yen over Euros or to look at foreign debt over U.S. Treasury debt in order to protect the value of their investments.

Monthly 7 period (month) average true range values have gone from as little as 300 pips a month in 2002 to nearly 716 pips per month now. They have peaked in 2009 and 2010 at over 1000 pips, and could do so again. Is that volatile? You bet it is. This kind of thing, particularly given sensitivity to the dynamics of the U.S. and European bond market interest rates, can continue to be crazy.

Can those levels be hit if things become even more negative for the Euro? Indeed, I think they can be hit.

What about in the near term? I think, as I have for many months now, that the 1.3475 to 1.3137 areas will be tested within the next few months (perhaps by year end, if not sooner).

Could we rally next week despite all the negative news? It is possible. Notice how we bounced off the 0.618 retracement at the close on Friday, September 9, 2011. Though daily momentum is negative AND below zero, it is still possible that we could have more to go, but we will have to keep our eyes open early next week.

What about those lower support areas? Are we going to break through them as well? A lot depends on policy makers. One thing I think Mr. Merk had right. The bond markets are firmly in control of currency movements. One thing traders must understand is that governmental intervention to buy or sell currencies, either unilateral or coordinated (countries complying with one another) seldom if ever WORK. It is better to read the charts than to listen to brain farts (particularly from politicians). Parity of value will be settled in free international markets.

How am I trading these markets? As many of you know, I began trading forex in late spring and was at the beginning trading on hourly charts so that I could give the trades room to breathe. For now, I have shifted to trading on an intra-day basis (10 minute charts) during the early session hours in Europe and up until about 11 AM EDT. I do this so that I can manage risk during these more volatile times that are filled with crazy and often conflicting news flow. I monitor average true range volatility on all the pairs and use a smoothed momentum trading model to trade currency pairs (no neural nets as yet, though some may be coming soon). As this volatility settles, I will shift back to hourly charts again and leave overnight positions on like I used to do. For now, I am essentially scalping to capture the meat of the intra-day swings during high volume trading hours.

As we get to the inflection points, I will post what I think will happen in more detail . I am excited about it because volatility can add to profitability as long as one identifies the swing and manages position size, stops, and targets.

Thanks again for supporting this blog. Let me know what other things you want to see. Leave a comment or send an e-mail to buffalotrader100@gmail.com

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