Taking a look at seasonality and sentiment in the Euro, I think that a pretty nice backdrop for a squeeze is setting up here. Seasonally, November and December are two of strongest months for the Euro. Additionally, with both sentiment and commercial hedging at two year lows the public seems to think that the Euro will head lower while the “Smart Money” hedgers think it’s heading higher.
With a strong backdrop provided by seasonality and sentiment, let’s take a look at price action.
Structurally EUR/USD has been a mess since its false breakout in April, but given sentiment and the factors listed below, a more neutral outlook is probably best as we approach support.
1. Breakdown out of long term symmetrical triangle.
2. Long bottoming tail at 9 year support level (needs follow through).
3. Positive momentum divergence developing.
4. Flat 200 week sets up the possibility of mean reversion.
Despite the neutral/bearish stance represented on the higher timeframe, I think that from a tactical perspective EUR/USD could be setting up for a nice move to the upside based on the following factors.
1. At a 9 year support level.
2. Price basing above trendline resistance (similar to what we saw in sugar futures before a move to the upside).
3. A very large positive momentum divergence has formed.
4. False breakout and positive divergence confirmed with a break above the 10/2 lows at 1.25.
Given the signals on the daily, combined with the sentiment and seasonality tailwinds present we want to be leaning neutral/bullish at current levels. To properly define our risk, we would want to be getting long on a close above that 1.25 pivot low with a stop back below that level. This would confirm the false breakdown and positive momentum divergence while providing us with a clear pivot to trade against. Our first target would be the October highs and prior support level near 1.29 where we would re-evaluate the situation. If we close back below 1.25 we’d know that we’re wrong and move on.
That’s what I’m seeing in EUR/USD. Feel free to share your thoughts with me on twitter or stocktwits @brunicharting.