Home > Commodities and Rates, Getting Global, Short-Term Trader > Trade Idea: Long Euro – Risk Assets Likely To Rebound

Trade Idea: Long Euro – Risk Assets Likely To Rebound

Perma-bears have a strong case for betting against the eventual disintegration of the Euro and one day their conviction may very well be vindicated. However, shifts on a macro-scale, such as this, take more time to pan out than what most market participants are willing to give. As we all know, timing is EVERYTHING!

The bullish case I make is predicated on a significant imbalance in sentiment and market positioning. In recent weeks, everyone and their mother has piled in against
the Euro, as evidenced by the historically large short positions in the  C.O.T.
reports (Commitment of Traders). On May 11th, the CFTC reported the 3rd straight weekly increase in record short positions by Non-Commercials (Hedge funds) in the Euro FX with a net total of -105,145 contracts.

CFTC

Once the 'Johnnies-come-lately' crowd recognizes that the Euro will be around longer than they want to be short and their untimely entries begin showing a loss, it is likely to ignite a sizable short-covering rally. The unwinding of their positions could send the EURUSD up 10% or more before stalling. This puts the Euro somewhere between 1.33-1.37, retracing the 3rd impulse wave of the decline which began late last year.

Overnight, the Euro briefly traded a 1.22 handle, breaching the 2008 low,
before closing back above this level. The fact that their was a break of this significant support level and then it was recaptured suggest we may have seen the low. A conservative way to play the bounce would be to wait for a rally to commence over the following days before entering a long position. This will at least allow for a solid pivot to form providing a 'line-in-the-sand' for stop placement.

 

Euro

Today, the S&P futures traded within almost five handles of filling the May
10th gap
before closing near the unchanged mark. This should hold as a successful retest of the swoon lower earlier this month. Support in the ES futures contract is Monday's low of 1112.75 with minor overhead resistance levels coming in at 1146, 1156, and 1172.

ES

If the EURUSD can in fact begin to rally, then not only should global equities get a lift but other risk assets as well. Industrials metals, energy, and carry trades have all recently gotten rocked and are due for oversold bounces.

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