EURUSD to Retrace Before Trend Reversal, Hedge Offers Entry

Daily FX
EURUSD to Retrace Before Trend Reversal, Hedge Offers Entry
Friday April 25, 1:27 am ET
By Ilya Spivak, Currency Analyst strategist@dailyfx.com

The EURUSD has been rising steadily this year, with a souring in Euro Zone data insufficient to halt the pair as momentum was determined to reach the historic 1.60 level. With a weak test and a failure to close above 1.60, the Euro bulls’ resolve faltered as the pair breached past the trend line that has dominated price action since early February. A trend change looks to be unfolding as markets settle from the euphoria of the rally and traders begin to re-evaluate underlying fundamentals.
A re-coupling with the slowdown in the US has tainted prospects for the Euro Zone, with yesterday’s poor printing of the German IFO Survey just the latest in a recent stream of lackluster data. Tomorrow’s calendar is virtually bare however, as is the first part of next week until a barrage of US releases starts with an FOMC rate decision on Wednesday and doesn’t end until Friday’s Non Farm Payrolls. We think markets will remain largely quiet as traders breathlessly wait for data to be released prior to committing to a trade before such a confluence of significant event risk.

The current decline has stalled at the 23.6% Fibonacci retracement of the 02/08-04/24 bullish run. We will look for a bounce up from this level as the pair consolidates current losses prior to continuing a lower for a bearish reversal targeting above 1.5340.

Hedging Strategy

Currency Pair: EURUSD

Long Term Bias: Bearish

Long Term Position: Holding Short (from 04/24 trend line break)

Short Term Bias: Bullish

Short Term Position: Long above 1.5647, Target 1.5803, Stop-Loss at 1.5581

Traders looking to protect their existing short EURUSD position or enter short at a favorable price may consider a hedge long EURUSD above 1.5647 with a target at 1.5803. Once the profit target is hit, we expect the bearish trend to resume. We will maintain a stop-loss on our hedge position should EURUSD break out to the downside prior to the limit being hit. We will set the stop-loss near 1.5581.

When should I use the hedging feature?

Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods – sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.