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Bulls and Bears Get Gored, Pigs Get Slaughtered, And Everyone Else Is Confused. What Kind of Shape Is The Euro Currently In?


You know I hate to make animal references in my blogs, as everyone knows my last name, but I guess today it is inescapable. Greece, Italy, Spain, and Portugal seem to be lined up like pigs to ride in the European Union (EU) “Austerity Bus”, ready to head to the processing facility of “Fiscal Responsibility”. One by one, in Greece, and now purportedly in Italy, we have replaced those gluttonous socialist politicians with “technocrats” who will only do this most correct and painful things in a straight and narrow way to prevent the all consuming debt from destroying the integrity of the Eurozone and the integrity of the EU,hopefully following the dictates of the European Central Bank (ECB). I know all of you believe wholeheartedly that the Eurozone will immediately eradicate its massive unfunded liabilities and march into the sunshine of eternal fiscal solvency. Manna will fall from the sky and there will be no want in the Eurozone again, because everyone will go to work, produce massive GDP, and not complain that a worker cannot retire at 50 on full salary EVER AGAIN!

What? You are not buying that rancid truckload of bacon? (It’s not Canadian bacon either, because at least Canada has oil, natural resources, and agriculture to fatten its currency).

Well, guess what? Not many others are either. Italian bond yields rose again. The situation in Greece is also tenuous at best. There are simply far too many unanswered questions and roadblocks along the way that the solution does not appear to be rosy or quickly coming to fruition. So clearly, the Euro must be instantly going into the burning pits of Hell in a highly flammable wicker basket. Right?…Well, not exactly. I have watched the pundits tell folks to short the Euro or go long the Euro or to anticipate a cataclysmic price action in one direction or another. Traders who have decided to stay positioned in one direction or the other ends up, when looking either at individual trades or to their trade equity day by day, looking a bit like this creature. They are thoroughly mesmerized, frightened by the wild swings in equity, and utterly confused (and probably out significant cash after a few trades). Is that you?

The bottom line is that the EURUSD (Euro Dollar Currency Pair) has reacted violently with every piece of purportedly good news or bad news that hits the wires, your cable TV via whichever financial talking head you are watching. While the Euro did swing rather rapidly during 2009 and 2010, this year, it has gone thermonuclear. Anyone trying to trade a straight trend has probably had pieces of their trade equity anatomy ripped from their account trying to stay firmly trending long or short this pair. The 7-day ATR as of 2130 EST was about 180 pips per day per unit (that is almost $1800 a day/unit. That kind of volatility could destroy a small forex account pretty quickly if one is trading in the opposite direction of the actual price action). Not even putting those expressions to music will help the pain of loss.

So what could happen to the EURUSD based on the most recent price action? If the Euro were to ultimately fall apart of be hampered by some kind of political or structural problem, this is how one major pattern would play out if an XABCD pattern would complete with near perfect price symmetry using a standard AB=CD pattern. (See the daily chart). If we do not rally beyond the previous high at 1.42475 and break below the October 4 low of 1.31458, then symmetry would suggest an ultimate low somewhere between 1.2489 and 1.2395. Without dragging out every momentum chart I have with the time I have, I can show you the following data:


Monthly Momentum direction: Bearish (Downward, close to oversold)

Weekly momentum direction: Bearish (Downward)

Daily momentum direction: Bullish (Upward)

For now, it does appear that the intermediate and longer-term direction for the EURUSD is bearish, but the daily mo tends to indicate that despite the sell-off this evening that a rally back to 1.3956 is NOT impossible should news events press buyers back into this market. For the time being though, I think it is best to consider the bearish case for now. I can present the bullish case at some other juncture (and I will if need be) but for now we need to either break above those key resistance areas around the 1.42475 levels to begin to really evaluate a strong bullish move for the EURUSD. For now, things still look volatile, but bearish.

How in the world do you trade this pair knowing that the volatility is almost if not totally out of control? Well, for one thing, if you are trading this pair, given the recent months trading patterns, if you are using a long-term trend following methodology, you are likely going to lose your shirt (and other articles of clothing) quickly. What I am doing in the midst of this volatlity is trading a simple momentum model that measures average true range in 3-minute bars, long and short. I attempt to capture HALF the average true range with each trade, and I take about 3 to 4 trades a session in the early morning from 0330 to 1130 EST, when the combined US and European markets are trading. I do that for 2 reasons:

1) to minimize risk of trades running against me based on news.

2) so that I can trade with requisite size to capture 20 pips/unit per day. (That is roughly $200/unit/day).

In any market that uses leverage (as forex and futures markets do), it is not wise to swing for the fences unless you have a model that you have confidence in (one that has been thoroughly tested and vetted against all kinds of volatility). If you take large risks, with very wide stops, I can promise you one thing. Your trading equity will vaporize RAPIDLY.

Remember that markets only trend about 1/3 of the time (stocks, futures, forex, you name it). The other two thirds of the time they cycle trendlessly. If you do not have a trading methodology that can handle trendless or highly volatile conditions, you are bringing a knife to a gunfight, and your equity will be destroyed ultimately. Trading a trend following model under those conditions is both idiotic and suicidal to your trading capital. That is not a supposition made by a C.M.T., that is a fact based on 30 years of trading. Take it to the bank.

There are countless ways to trade markets successfully. If you have not done so, you should read Market Wizards and New Market Wizards by Jack Schwager. What you will find there is over 30 interviews with traders discussing how they developed their trading strategies, made mistakes, blew up, returned again and eventually succeeded by honing their methodologies. The only holy grail they had existed between their ears and was improved by their determination to conduct mistake-free trading according to a well-defined and written down trade plan. Anything less than that will ultimately lead to failure. That plan should also include any antecedent market conditions that qualify the plan to be executed. Trending is a market condition that only exists about a third of the time in most cases. If that is all your have in your trading game, you need to step up and learn another one.

That is it for now. More to come soon on forex and equities. Thanks for supporting this blog!

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