EURUSD: What Friday’s Move Predicts

Last week saw some long-awaited moves on the majors after what seemed like an eternity of doing nothing. Here is the EURUSD daily chart to emphasise my point:

These big moves and the market’s reaction to them are likely going to set the tone for the weeks ahead, so let’s break down what the market is telling us.

1. The range. The EURUSD spent 29 trading days stuck in a 190 pip box.
2. The Bulls made the final run to bust through resistance, starting on the 21st of June, and rallying some 300 pips to top out on the 29th.

It’s at this point that things get interesting. Let’s imagine that you are an institutional trader, with billions of dollars to manage in the market. You’ve had a rough six weeks with price stuck in its very tight range. Then the rally comes, and all your long positions wipe out the losses you’ve sustained throughout the month and put you into profit. Let’s imagine you’re looking at your profit and loss statement on Friday morning last week – the last trading day of the month. You know that at 5 pm, you need to report your profit or loss statement for June to you risk manager, clients, investors and so on. Just a few days ago, you were badly in the red. Would you close out your positions in profit, hit the weekend early, forget about the tough month you just endured and return refreshed to start the new month on Monday? In a word: Yes.

3. This ‘counter-trend’ move we saw on Friday is exactly that: profit-taking.

So the question is, is this profit-taking likely the start of a new down leg for the EURUSD (and most of the other majors), or simply a pause and retrace before new highs?
It’s this traders opinion that the EURUSD is still set for the 1.16 mark, and Friday’s price-action is our first clue.

Do you see how price was driven down in early trade on Friday? This is profit-taking. We know this now because we can see how the buyers stepped in from the 1.1390 level and supported price, pushing price back up above the 1.1400 mark. If the market were expecting a major reversal here, the ‘big-money’ buyers who supported price and picked up some EURUSD below 1.1400 would not have done so, and we would have seen a sell-off.

So what’s next for the EURUSD?

We’re almost certainly in for more of a retrace before all the sellers are shaken out of the market. Here are my thoughts:

I’m interested in buying the EURUSD, but only after it’s had a decent retrace. As you can see from the chart above, we have support at 1.1350 and further down at 1.1290- both of which are likely to provide support – and an influx of buyers. My preference is to buy at the lower level (1.1290) and only when I see evidence of buyers coming in. This sets us for a 250-330 pip target.

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