The euro is not oversold from a daily perspective but it is approaching some solid support levels that could provide quality buying opportunities.

On Wednesday, the euro’s nearly 300 pip fall against the U.S. dollar was the largest one-day fall since September of 2008. That’s worse than any single day during the European debt crisis. Without doubt, we see the euro moving lower from here in the medium term. In the short-term, however, we are nearing uptrend support and support from the June low of 1.2737.

We could see a further slide close to support on Friday, especially if U.S. retail sales disappoint. But looking to next week, there is very little on the data docket to spook the broad market. To us, that skews the risks toward a mild recovery trade. With that in mind, we would look for opportunities to buy the euro at below 1.28 with the expectations that we will see a re-test of 1.30 in the week ahead. If the euro does return to 1.30 we will be quick to take profits and initiate short positions for an eventual fall to new lows.

Our initial reaction to the stress tests is disappointment but we think the trade is to buy EUR/USD with a stop at the session lows. We would have liked to see a better stress test that included all the sovereign debt on banks books (rather than just the trading book). But what’s priced into the market? There is a €700 billion backstop on sovereign debt in Europe so there will not be a default. With economic data improving the market is pricing in a diminished chance of a double-dip recession so that is unlikely as well. The euro is down 60 pips to 1.2832 on the slightly damaged credibility of the ECB but we thought the U.S. stress tests were a sham as well (they forecast 9% unemployment in the adverse scenario). The market will turn its focus back to European and U.S. fundamentals and we believe that will reflect positively on EUR/USD in the short-term. Stop at the session lows but look for an eventual rally to 1.32. Remember that in a sentiment-driven market anything is possible so stay nimble.

The U.S. dollar has become the dog of the foreign exchange market and we expect the EUR/USD to continue rallying after a short pullback. The USD eked out only small gains against only the CAD and AUD on Thursday and experienced substantial declines against EUR, GBP and JPY. The market is beginning to grab hold of a theme that the U.S. economy will underperform expectations. Although we have seen a slight rebound from the dollar early on Friday, the overarching theme remains.

The trigger for the sudden surge in USD selling was Wednesday’s minutes of the June 22-23 meeting. In them, the Fed lowered growth forecasts and said the U.S. economy may not fully recover for 5-6 years from the Great Recession of 2007-09. Richmond Fed President Jeffrey Lacker, who is usually optimistic, even allowed that the U.S. will recover “perhaps at a pace that is less robust than has been typical of past recoveries.” Financial regulation reform, which passed on Thursday, is also making the U.S. a less competitive hub of global finance.

At the same time, the focus is shifting away from Europe. A recent sovereign downgrade of Portugal by Moody’s elicited hardly a blip in the forex market. On Thursday a successful Spanish bond sale further reinforced that a euro breakup and sovereign defaults are no longer a pressing concern.

The huge rally in EUR/USD yesterday pushed the euro above the 100-day and 100-month moving averages and points to a continued recovery in the euro. Expect the consolidation that has begun in Asia to continue as the week comes to a close. The RSI isn’t overbought and there is plenty of technical fuel for a rally but the odds favour intraday shorts on Friday.

Today’s price action was the signal we were looking for to mark the top in EUR/USD. We had a blowout to the upside that has aggressively reversed.

The main news of the day is that China will allow the yuan to appreciate against the USD. Analysts are scrambling to interpret the news and the market has been equally undecided. The U.S. dollar has been a main beneficiary on sentiment that U.S. manufacturing will be more competitive. Initially, the stock market liked the news but a stronger yuan probably means slower worldwide economic growth so that sentiment appears to have taken over.

The idea that China is curbing growth and inflation is weighing on the EUR. There is also a feeling that the entire up-move in EUR/USD was fuelled by short covering. CFTC data released late Friday shows a massive contraction in EUR net shorts so there is evidence that the slump has been little more than position squaring.

The daily chart now shows a downside reversal. We also see an inverted hammer pattern. Confirming the downside is the resistance at the top Bollinger Band, the RSI and the 50-day moving average.

The euro has started out the week by rising the highest since June 4 as it builds on a rally for the past week.

Over the past six months it has been rare for the euro to string together several up-days. We remain extremely bearish on EUR and will be using this bounce as another opportunity to sell. The question is: when is the right time to sell EUR/USD?

We noted the IMM data released on Friday. It showed EUR net shorts near record just shy of a record high. Remember that IMM data is from the prior Wednesday (in this case June 11). On that day the euro traded at 1.19 compared to 1.2178 currently.  That points to a short squeeze over the past few days. But with the market positioned so agressively short, the squeeze could still have some way to go.
We see three simple targets. 1.2334, 1.2467 and 1.2691. We don’t see the highest target as realistic. Market participants are so bearish on EUR that it will be sold long before it hits 1.26.

Looking at the Ichimoku Cloud on our 4-hour chart we think a somewhat agressive move higher to 1.2567 is possible if we get a close above the top of the cloud (on a 4hr chart).

We will have our sell orders ready, however, once it gets above 1.2334.

Note that the European Union is hosting a summit beginning Thursday. The market will be looking for signals about fiscal austerity and plans for further market intervention.

The head and shoulders patter we warned about last week was finally completed in EUR/USD as the pair broke down in spectacular fashion today. The catalyst were comments from a spokesman for Hungary’s Prime Minister who said the nation is in a “grave situation” because the previous government “manipulated” data and “lied” about the state of the economy. Turkey isn’t a part of the euro but is on the periphery of the zone. Worries about Spain also ignited and credit default swaps around the region soared.

Technically, EUR/USD continues to be in bad shape. We have frequently advised selling this pair and always advise following the trend. As everyone knows by now, the trend in EUR/USD is lower. We watched over the past week as a host of economists, strategists and commentators advised buying euros. Obviously, they were wrong.

The only question is: how far will the euro fall? The market has squared its focus on the late-2005 low of 1.1639. As we previously mention, this corresponds with the measured target of the head and shoulders pattern.

We think that any entry point is a good one for the coming week but, as the RSI shows, we are oversold on the two hour chart.  It would be no surprise to see a rebound to 1.21 late on Friday or early next week. This would represent a great entry point provided you could withstand a potential short-squeeze to 1.23, which would be our stop. The whole trade represents a potential profit of 450 pips and a loss of 200.

The euro once again turned lower today on reports that Spanish banks are unable to borrow and a story in the Financial Times suggesting that Safe — the Chinese government investment fund at holds an estimated $620 billion in euroarea debt — is worried about its investments in Portugal, Italy, Ireland, Greece and Spain – the so-called PIIGS.

The euro tumbled on the news and has fallen below initial support at 1.2177. The cycle low of 1.2144 could be breached imminently and that would be a very bearish signal for EUR/USD.

The pattern that points to further losses is also a classic head and shoulders formation.

The neckline has already been breached and the negative outlook would be confirmed by a fall below 1.2144. The measured target of the head and shoulders is 1.1683, which dovetails nicely with the 2005 low of 1.1639.

Overall, the fundamental and technical reasons are in place to be short the euro. Sell any bounce.

We are trading very well at the moment. We have repeatedly warned about the Australian dollar and our downside targets against CAD and USD have been met. We were impressed by the continued weakness against the euro today and it looks like the bearish phase in the euro against the commodity currencies might be coming to an end.

Today, we want to focus on gold. For years we have been skeptical of gold bugs and their prognostications of $5000 gold. It’s a group that’s filled with conspiracy theorists and worry-mongerers.

In the last siz months, however, we have grown more and more convinced that the gold rally is just getting started. Sovereign debt worries are for real and many countries will eventually give in to inflation as a solution to their overspending. The implications are unambiguously bullish for gold.

After reaching all-time highs last week, gold has slumped. For us it’s not a matter of buy or sell, it’s only a matter of when to buy and when to take profits. At the moment we are looking for buying levels.

We see that the RSI has fallen into oversold territory but it could still fall lower. On the downside we have the fibonacci lines at roughly $1170, $1150 and $1120.  We also see various trendlines with the most meaningful one (to us) at $1140 currently. On the whole, we see a great deal of support in the $1120 – $1170 range but support thins out below that.

We will be stacking up buy orders in this range on the possibility of a quick spike toward the bottom of the range. If we see a fall below $1120 we may be forced to reconsider.

Yesterday we pointed out the weakness in the Australian dollar and noted the bearish patterns. AUD/USD went on to fall badly. Today, we are looking at EUR/AUD and an interesting weekly chart.

The downtrend in this pair has been clearly and cleanly in place for 10 months. On Wednesday we went from the bottom of the range to nearly the top in a one-day 600-pip move. This is a positive for the euro on this cross but it doesn’t yet signal a reversal. Instead, it looks more like a short squeeze. Watch for a test of the top of the range in the day ahead but look for heavy selling around 1.50. Gold is very important to this pair. With the $30 fall in gold on Wednesday, we are cautious of a further pullback, which would be bearish for AUD.

The currency market seems to have disconnected from stocks, bonds and the broader correlations are stretched. The AUD and NZD were beaten down badly today while the EUR and GBP rallied, throwing a wrench into the risk-aversion/risk-appetite trade. We have to note that when correlations start to break down, as we’re seeing, it’s a sign of very high uncertainty in markets. It often leads to high volatility and quick moves. We see no end in sight to the incredible trading opportunities that are presenting themselves every day.

The Australian dollar is nearing critical support and in danger of falling to an eight-month low. There are signs of oversold conditions as we near support at 0.8578 and a bounce is possible. A sustained break below that level would be very bearish.

We also have to address the euro, given the events of the past 24 hours. We were constructive on the euro’s fortunes heading into yesterday’s session. We saw the potential for a bounce to 1.27 or even 1.31 on extremely oversold conditions. The market was tracking higher for most of yesterday’s session as the market touched 1.2445 but the legs were kicked out from under the euro after Germany banned certain types of short sales. German financial regulators banned naked short sales of exchanged traded euro area debt, credit default swaps and on the shares of 10 financial institutions. In the medium term, this is very bearish and the market closed below our sell line at 1.2330. We will look for levels to enter short positions.

The Australian dollar was beaten up badly on Tuesday and continues to face pressure so far today. Notice how close we are to the 8-month low.

We have fallen very quickly in the past two weeks. After the panic low on May 6, we have rebounded only to trace out a fresh low. That price action is bearish, no doubt.

We have to point out that the RSI is flashing a very oversold signal. In this case, we will ignore that signal if we see a sustained move below the 0.8578. The measured target of the drop would be 0.7754, there is also support at 0.7702.

Stops were cleared out in EUR/USD in the Asia-Pacific session as the euro plunged to a four-year low of 1.2234. Sentiment quickly began to shift, however, with conditions heavily overbought and the market managed to reverse for a positive close. The change in sentiment generated a bullish hammer reversal pattern on the daily charts.

The euro rebounded to close above key support at 1.2330 so the breakdown to the 1.22s will likely be seen as a false breakout. If we can put in a bottom here (even if only for a few days or weeks), there is considerable upside. We wouldn’t rule out a test of 1.31 but think 1.27 is a more likely short-term target.

We remain on guard against a close below 1.2330 as the trigger for another sustained downleg.

All eyes on the critical support level at 1.2330. That was the low in October 2008 after Lehman Brothers collapse and was the low from the credit crunch. In Asia-Pacific trading we fell as low as 1.2333. A sustained break below that level would be bearish for the euro and would likely ignite further stop loss selling. On the other hand, if sentiment begins to improve, a sizeable bounce is possible.

We think this presents a good opportunity to cover EUR/USD shorts. As the weekly RSI shows, the euro is due for a bounce. We are also at a critical support level that won’t be given up easily. The risks, to us, a skewed badly to the upside.

Another factor that we will watch is the U.S. stock market. It has rallied nearly every Monday since the start of 2010. Futures are pointing to losses, but it’s early and we don’t like to fight a trend.

If we see a further breakdown and close below 1.2330 in EUR/USD we will initiate new short positions but until we see that, we are looking for better levels to sell. Agressive traders might even attempt small longs, with tight stops.

The trend is your friend. We have heard that axiom so many times and we still feel like it can’t be repeated enough when we see a trend like this.

Notice the beautiful, consistent downtrend in this pair. We also have to note that this was the worst performing pair over the past week. It fell 810 pips from top to bottom.

We are now bouncing off the bottom of the channel. Despite the problems in Europe, we see the potential for a bounce here and believe that aggressive traders might want to wade into long positions, with very tight stop losses.

The RSI is not yet extremely oversold but, at 23, it’s close. We’re not sure whether a bounce will come from euro strength or Canadian dollar weakness. We are long-term CAD bulls but the action over the past week concerns us. CAD was the weakest performer on Friday and closed above some key resistance levels. Oil also continues to struggle.

European leaders unveiled a nearly $1 trillion rescue effort designed to stop the  euro’s fall and stabilize sovereign debt spreads. The move led to a rally in EUR/USD and a big improvement in broad sentiment.

EUR/USD is now in the fibonacci retracement ‘box’ which falls between 50% and 61.8% of the May 3-6 sell-off. The values are 1.2918 to 1.3016. We feel that the euro will have to break above 1.3016 in order to trigger a full retracement to 1.33.

Interpreting fundamental news in a volatile market is difficult. Our initial inclination was that the package was very bullish for the euro. Our long trading history, however, has taught us to very important lessons: 1) don’t fight the trend 2) listen to the charts.

The 10 minute chart looks like this.

We have highlighted the ‘gap’ that opened on the weekend. Early in trading we saw a series of lower lows and the gap looked like it was going to be closed. When the news of the bailout was announced, however, the euro pushed higher. Unfortunately,  EUR/USD was unable to breach the 1.2947 high. This will now act as short-term resistance.

In light of the inability to break above 1.2947, with resistance looming at 1.3016 and a with long-term downtrend in place we have no choice but to be bearish of EUR/USD. The key support in the short-term rests at 1.2809.

This is a high-volatility market and nothing would surprise us. There is definitely money to be made.

The

The market seems to take every small bounce as yet another opportunity to sell the euro. Earlier today we traced out a low of 1.2804 before bouncing a full 100 pips. The euro then started to fade again and eventually fell to 1.2790. Support is thin below 1.28 with 1.25 as a target that many are touting.

One school of thought has shorts being scaled back leading up to the ECB rate decision in about 16 hours’ time. That would lead to a euro bounce. The other school believes the ECB has very little ammunition to fight the falling euro. ECB officials have tried to ‘talk up’ the strength of the Greek bailout for weeks now and the market is now at the point where there really nothing Trichet and Co. could say to stop the tide of euro selling. The focus has shifted to actions they could take and policy moves such as bond buying or interest rate cutting are far fetched. The biggest risk to the euro is that policy makers sound tired, repetitive and helpless. That would unleash another round of euro selling. In the lead-up to the decision, however, we don’t expect a further powerful push to the downside. The risk are likely skewed toward consolidation but in the short-term 1.2790-1.28 will be key.

It’s a scary day in markets today. Stocks are getting beat-up like the credit crunch was still raging and the S&P 500 have given up some important support. Commodities are down big. The Australian dollar is getting crushed despite a rate hike that wasn’t fully expected. And our long gold trade is giving back most of its gains (but it’s still in the money).

Everyone knows the markets are in for a rough ride at some point after the generational rebound from The Great Recession. Is this the big correction? We think it could be, but our conviction is still low.

In the meantime, we look to the charts. Yesterday, we talked about USD/JPY and we have to note that it got as high as 94.99. We warned about the possibility of a false breakout. Now that we’re back to 94.40, we think the chance of a reversal is growing but we reserve judgement until Japan comes back from holiday at the end of the week.

The pair we want to focus on today is EUR/GBP. The euro is getting smashed today. Greek 2-year yields are back up to 14% and European policymakers must be starting to think about hitting the panic button.

Two months ago, the euro was beating up on the GBP on worries about a hung parliament in the UK. Now, it seems like electoral deadlock in Thursday’s election is among the most minor problems in the eurozone and its periphery.

This is an important break below support at 0.8601. We expect a bounce to a re-test of this line and that bounce should be sold. The problems in Europe far outweigh concerns in the UK. Moreover, the Conservatives have gained momentum heading into the election and could pull out a majority (we put the odds at 50-50).

We target 84.50 or 84.00.

A chain of events has led to the powerful selloff in EUR/USD and the pair has fallen to the lowest since May 2009.

The moves were kicked off as the European Commission revealed that Greece’s deficit, at 13.6% of GBP, is worse than originally reported and could be further revised down by 0.5 percentage points. The euro then bounced on reports that Greece could ask for a short-term loan while details of a bailout package are worked out, in a so-called “bridge loan.” Then, the selling resumed when Moody’s cut Greece’s sovereign ratings to A3 from A2 and placed it on review for further possible downgrade.

Now, with the G20 upcoming, there is speculation that the body could increase pressure for some sort of action. It seems as though the bond market is pushing the agenda with yields on 10-year Greek bonds surging to 8.70%, compared with 3.04% for comparable German bunds.

There is also talk of panic selling in euros as stop losses are blown out. The technical picture points to continued losses.

The next major support level isn’t until 1.2896 and that certainly is a major low as it represents the correction low in April last year. There is talk about some support at 1.3150 and there will be psychological support at 1.30.

Overall, however, the situation is negative and we don’t expect any major euro rally. Sell any bounce.

The euro fell below the April 9 low of 0.8706 today on growing concerns about the indebtedness of Greece, Portugal and Spain. Now, a continued to fall to the January low of 0.8601 looks likely.

There is some support at the 100-week moving average at 0.8656 but the market is clearly favouring the GBP over the EUR.

Fundamentally, there is reason to like this trade as well. The market now seems to have come to terms with a hung Parliament in the UK and past history has shown that the GBP can still rally in such a situation. Now, the focus has moved to a growing inflation problem in the UK. With the consumer price index over 3% in the UK and still showing signs of momentum it is highly likely that the BOE will raise interest rates before the ECB (or the Fed for that matter).

With the concerns continuing to mount about Greece and Portugal, the euro is in bad shape. Debt spreads rose to a record high of 522 basis points in Greece today and even a rescue package may only prove a brief respite. It seems the market is now also targetting Portugal, where spreads also hit a record high today.

Expect this pair to fall to at least 0.8400 but exit the trade if the downtrending channel is pierced on the upside.

Greece got its lifeline on the weekend in the form of 45 billion euros from the European Union and International Monetary Fund. It’s a staggering amount of cash that will be lent at about 5% for three years. Greece does not yet want to take the cash and instead will try to tap the market in the hope that the EU/IMF backstop will bring down borrowing costs.

Overall, the value of the loans is much higher than the 10-20 billion euros the market was expecting and the interest rate is about as expected. In the short-term (this week) this should calm European nerves and boost the euro. The market is massively short euros and this is sure-fire catalyst to spark a short-term rally.

Technically, the picture is clear.

We have a long-term downtrend that has been broken after a clear double-bottom formation. The measured target of the double bottom is 1.3912, which is above resistance at 1.3816 but below the early-Feb high of 1.4025.

We don’t think the market will have a huge rebound because there are still lingering fiscal problems in Spain, Ireland and Portugal that must be solved. Moreover, downtrends rarely reverse. They usually first experience a period of sideways movement. Given that, we expect to see and range-trade develop between 1.35 and 1.40.

The euro continues to get battered on worries about Greece and the pound sterling continues to bounce on hopes for a clear Conservative win in the May 6 election.

Technically, we are seeing a nice channel moving lower on the two hour chart. Above that, there is further resistance from the month-long downtrend.

At one point, we sense a great deal of optimism about Greece. The European Union appeared united and the austerity plan seemed legitimate. That is all starting to change. It’s clear EU leaders can’t work together and Greece continues to find hidden debts.

The bond vigilantes returned today and pushed Greek spreads to a fresh record of 410 basis points above German bunds (10-year). For euro traders, that’s a sell signal of the clearest kind. The Greek story is about to take another leg for the worse and there is no trade but to sell the euro.