Euro Traders Should Look Beyond Greek Elections

The Weekly Nearby euro closed up for the second consecutive week. The up move was subtle, however, indicating that it was probably more short-covering than new buying. The trading action also regained the August 2010 bottom at 1.2552. Many had thought that a trade through this level meant the euro was going to test the June bottom at 1.1849, but this was not the case as a few well-timed news “stories” proved to be enough to scare some of the weaker shorts into paring their positions.

The ‘story” which helped put in the bottom dealt with the possibility of a Spanish banking system bailout. Although a $125 billion figure was announced, after an initial surge, traders left the euro as details of the bailout were never revealed. This created uncertainty and the market sold off until Tuesday when it once again began a steady climb until late Thursday when rumors that central banks stood ready to back the euro should the election results in Greece prove to be disastrous, drove it through the elusive 1.2600 price level.

Although the trading action seems orderly, it actually reflects fear and uncertainty. With negative fundamentals piling up on the euro, the single currency is in the control of the bears at this time and these bears are backed by big money so they aren’t likely to overreact on rumors and speculation. Sure it is possible that the euro has reached a bottom, but more than likely, weak shorts have been the driving the market higher. In addition, the euro isn’t even close to changing the trend from a technical standpoint.

Technically speaking, the euro is in a down trend and it will remain in a downtrend until the last swing top at 1.3304 is taken out. One clue that it may attempt to regain some of the territory it lost over the last month, is the close over the downtrending Gann angle from the 1.4925 top at 1.2565. While this action puts the euro on the bullish side of the angle, we’ve seen the same move before and each time it failed to change the sentiment to bullish.

Even if there is further upside action, the euro is likely to find solid resistance at 50 to 61.8 percent of the move from 1.3304 to 1.2305. This potential resistance zone is 1.2805 to 1.2922. Additionally, another downtrending Gann angle drops in at 1.2835.

If the Greek elections are favorable for the euro, the market is likely to run up into 1.2805 to 1.2835 before attracting fresh shorting pressure. Additionally, if the elections produce negative results and the euro begins to weaken, concerted central bank activity is likely to prop it up, driving it into the same resistance cluster.

Rather than worry about how high the euro can rally before meeting resistance, I think traders should be more concerned about when the major players decide that the Greek elections are no longer an issue and the focus turns back to Spain and Italy. The current events combined with the chart pattern suggest that the euro is set-up for a potential bull trap.