Looking for a Euro Sell Signal

Includes: DIA, FXE, QQQ, SPY
by: Scott's Investments

Adam Hewison gives a technical breakdown of the Euro in this video and his ultimate long-term target is parity, 1:1. In the short to intermediate term, the technical picture (click on chart to enlarge) shows some momentum indicators rolling over (a potential bearish sign) but the Euro is still somewhat of a mixed picture in the short-term. Looking at FXE, the CurrencyShares Euro Trust ETF, the levels I am watching closely are 118.79, 121 and 124. If FXE drops below 121, a short trade could be in order. Alternatively, an investor could wait for a new low below 118.79 before entering a short position. On the upside, a close above 123.80-124 could signal the short-term rally still has some legs, possibly to the 23.6% fibonacci retracement level of 126.46. I will keep an eye on FXE and offer any new updates on my site in coming days.

Besides going short FXE, some potential option trades: Sell a 124/125 call spread. It last traded at $.32 giving you a max profit of $32 per contract and max loss of $68, but the risk of entering the trade now is that we don't have a clear short-term signal. Obviously, if FXE dropped below 121 the premium on this trade would decrease significantly so at that point I would look at the 121/122 spread since 121 becomes resistance.

One could also go long the 126 July puts if a sell signal is triggered. It last traded at $3.75 and has a large open interest (which means it's more liquid) than most other FXE July strikes. The max loss is $375 per contract but by buying a put that is in the money it is possible to leverage a small amount of capital in a swing trade. In the money puts like the 126 strike have higher negative deltas (currently -.77), meaning that for each $1 change in the underlying security the 126 July put will change $.77 in price.

Hewison also notes that recently the Euro and US equity markets have been positively correlated - the Euro rallies and US equity markets follow (or vice versa). Looking at an asset correlation chart of FXE and SPY, positive correlation between the two has spiked since mid-April and is around .46. However, I personally am not going to place much stock in the current correlation between the two to make a single investment decision on an individual position. Using ETF Replay correlations between the two can change quickly and vary from positive to negative - over the past 5 years the 60 day correlation between the two has ranged from -.56 to +.67.

The long-term trend in the Euro is still negative. However, in order to increase odds for a successful short trade in the face of the Euro's recent mini-rally, I think right now is a time to wait for a sell signal using some of the price levels and indicators mentioned above.

Disclosure: No current positions