EUR/USD: Retraced Significantly Off Its Lows
Dailyfx | Mar 29, 2015 01:52AM ET
Talking Points:
- Price reversal has been accompanied by an increase in volume
- EUR/USD SSI is at -2, traditionally bullish signal
If you’ve followed currencies at all over the last few months, you know how strong the US Dollar has been; especially when put up against comparably weak currencies like the Euro. Retail traders have even gotten in on the action by becoming disproportionally short the EUR/USD. But even though the long term trend is pointing down, seeing retail sentiment selling at a 2:1 ratio gives me pause.
Today we will look at the Euro/Us Dollar using retail sentiment and retail volume and see if there might be a potential buying opportunity.
EUR/USD Reversing With Above Average Volume - Bullish
One benefit of using the Real Volume indicator on FXCM Marketscope’s charts is being able to use it to confirm reversals. This is a topic I’ve discussed in previous articles, but it is very easy to summarize the logic behind it.
Whenever we see price move counter to the trend, we want to gauge how strong the move actually is. This means we want to see price retrace significantly AND see a larger than average amount of trading volume throughout the move. The larger the move and the more real volume backing the move, the more likely the reversal is to continue.
The chart below is a EUR/USD Daily chart using Real Volume. I have highlighted the area to focus on. We can clearly see the EUR/USD has reversed from its low of $1.05 up to $1.10, but most interestingly doing so with a massive increase in volume. The 4-day period where price moved the greatest number of pips was the most (FXCM retail) volume traded during a 4-day period in the last 3 years, truly a significant event.
Because volume was so great during this countertrend move, this gives me reason to believe that this bullish run could continue in the future.
Learn Forex: EUR/USD Reversal Confirmed by Above Average Volume
The fact that volume confirms this EUR/USD reversal is not the only reason I am looking to buy the Euro either. Retail sentiment is also making a convincing case.
EUR/USD SSI is Negative - Bullish
The Speculative Sentiment Index or SSI gives us the ratio between retail FXCM traders that are currently long and short each major currency pair. We use this as a contrarian tool to help guide us on what direction price might be headed. The general principle is we look to buy when SSI is negative and sell when SSI is positive.
Get The News You Want
The chart below shows the relationship between SSI and price over the last 2 years. In late 2013-early 2014, when Euro SSI was heavily negative, EUR/USD was in a massive uptrend. It wasn’t until SSI started flipping positive that price began to tumble. We’ve witnessed spurts of negative SSI as price has fallen, stalling the downtrend until SSI flipped back positive and price dropped further.
Learn Forex: EUR/USD SSI Flips Negative as Price Rises Off Lows
But if we continue to see SSI at a negative value or move even further negative, EUR/USD could take a dramatic turn higher. This would catch many retail traders off-guard and could cause a cascading effect of buy orders to cover short positions.
With the EUR/USD SSI currently reading -2.0, I have a long bias.
In Conclusion
Both Real Volume and Retail Sentiment point towards the Euro rallying against the US Dollar, which could be a good trading opportunity. But remember, there are no guarantees in trading. Perform your own due diligence and trade using sound money management. Also, feel free to utilize a demo account to practice trading risk-free before trading with real money if you are just starting out.
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