June Euro: Bears Drive Action

The June Euro futures contract is posting a slight gain this morning. The gains are being attributed to the favorable Spanish auction. Talk of possible aid from the European Central Bank and a favorable nod from the U.S. Federal Reserve regarding additional stimulus has been providing support for the Euro over the past four days.

Fear Factor
Whether the rumors are true or not, they have put a little fear in the hearts of short-traders who were looking for an excuse to lighten up on their open positions. Fundamentally, nothing has really changed in Europe except for trader psychology. Instead of selling short and asking questions later, the bears are demonstrating that they are at least willing to listen to the stories floating around out there. The fear of giving back profits seems to be the driving force at this time.

I don’t believe there is enough valid information available to encourage buying at current levels, but from a short-trader's perspective, there are enough rumors to warrant taking cover at this time, which is why the June Euro has reached a balance point on the chart.

Technically, the June Euro is currently behaving like any market would following a closing price reversal bottom on the daily chart as it did on June 1. Based on this pattern, a market typically retraces 50 to 61.8 percent of the last down swing. Since the last move down was 1.2826 to 1.2288, the first upside target zone was identified as 1.2587 to 1.2620. Currently the market is trading inside this retracement zone so a move to the downside will not be a complete surprise. In addition to the potential resistance zone, a downtrending Gann angle at 1.2586 could encourage some profit-taking selling.

Needless to say, the Euro has reached a critical area on the charts. The current set-up has created a key area of interest, which should create higher volume and perhaps greater volatility.

Lack Of Support Base
The main trend is still down and that will not change until the swing-top at 1.2826 is violated. In the meantime, the major concern for traders should be the lack of a support base. Technicians often say that the height of the market is determined by the length of the base and at this time, I don’t see a support base, I see a closing price reversal bottom.
 
This means that in order to gain credibility with bullish traders and to scare a few more shorts out of the market, the June Euro has to form a secondary higher-bottom. This can only happen if the market retraces its short-term rally from the recent bottom. Once this move is made, new buyers are going to have to step in to prevent a new low. If this occurs then I can build a case for a possible change in trend, but right now this looks like a rally in a bear market. Stay tuned for further developments.