The technical trading plan for the EURUSD through the ECB decision

Revised from the original post from late yesterday

The EURUSD has experienced a minor rally in trading prior to the all important ECB decision and subsequent press conference.

As reported yesterday, even with the leaks, there still plenty of unknowns (see Adams preview) that will make for a wild ride. Was yesterday’s action a test run of what we will see today with up and down volatility, or did it the action force the market players to reconsider positions and square up in pre-event trading today (and thus take away some of the volatility)?

I would have to err on the side a lot of volatility in trading today. Surprises have been the norm of late and although the ECB leaked some of the details, the element of surprise seems like it is the modus operandi, with the SNB and the Bank of Canada shocking the markets. What is not known – and which can be shocking – will be in the specific details and in how that story is communicated.:

  1. Will Germany participate?
  2. Will the ECB be the buyer of the sovereign debt and share the risk among the members?
  3. Will the ECB have each respective country buy their own bonds?
  4. What maturity of bonds will they purchase?
  5. Is there an end date and/or end amount?
  6. What will Greece do?
  7. How will Draghi and the headlines be communicated and interpreted?

It will indeed be a wild ride, but overall, the fundamentals remain more to the downside for the pair. So rallies are likely to be sold, maybe not tomorrow, but going forward.

Technical levels to eye in the EURUSD through the ECB decision

Technical levels to eye in the EURUSD through the ECB decision

What about from a technical perspective? What are the charts saying?

The current price as the pair trading away from the the 100 hour MA (blue line). The 100 hour MA is always a nice place to start/stop/use to define risk and a bias (after the fact). This will be the bullish/bearish initial line in the sand for me in trading once the dust has settled.

  • On the topside, the following levels are all key technical levels that should have some significance to the market. They are nothing fancy. Everyone can see them/ should know them. They include:
    • 1.1639 = 2005 low
    • 1.1682 = 200 hour SMA (green MA line)
    • 1.1743 = The level the EURUSD was originally priced on January 1, 1999
    • 1.1876 = Post debt crisis low from 2010 (until this month
    • 1.1975-1.2000 = I consider this a gap from the weekend of Jan 2 to Jan 5. The 5 PM high on Jan 5 was 1.1975. The low on Jan 2 was 1.19999
  • On the downside,
    • 1.1582 = 100 hour MA (blue MA line) and trend line connecting recent lows
    • 1.1539 =Low for the week
    • 1.1459 = Low for the year
    • 1.1372 is the low from November 2003 and lower trend line on the hourly chart

Understand that the dynamics exist for a volatile reaction on the announcement. Also be aware that it may be a series of headlines that piece together to tell the story. It will be the complete story that should dictate – not necessarily the initial reaction off the first highlighted headlines.

What about being oversold?

  • I cheated (I don’t use RSI and don’t advise using it) and put a 14 day RSI on my daily chart to see were the RSI stood currently. It is below 30, but it has been below 30 since January 2nd when it closed at 1.2000. Oversold can remain oversold in a trending market.
  • I also know that the commitment of trader report which last week as of the close on Tuesday (I think that is what it shows) was net short – close to record levels. Between that time and now, the SNB exit from the peg, and the price trended even lower. So there has not been that short rally, nor do we know what the net position is now anyway.
  • The price has been stepping down nicely with little threat to broken levels. The 1.1876 level was the first step to get below (see green dashed line). The price broken and stayed below. The 1.1743 another level. The price fell below and stayed below. The 1.1639 low (2005 low) was the next major level to be broken and the most recent. The price today did break that level in the wild ride today, but could not sustain the move above. This will be a level to watch after the decision and volatility is normalized tomorrow. Stay below (or fail again on a break above) and the sellers are still king

As mentioned, I don’t think the end of the trend is here for the EURUSD (i.e. rallies will be sold). However, one must always be aware of the corrections that clear out the shorts. So listen to the levels, watch the price action at first before venturing in the deep end. Remember, there will always be another trade. So trade like you know what you are doing. It starts with planning the trade. I hope this helps you and gives you the reasons.