Tasty Treat on EUR/GBP?

Cross posted on my blog, Currency Cross-Eyed

Trade Idea: 2012-10-31 02:23


Greetings, fellas! I know y’all love your sweets, so here’s a tasty treat, just in time for the Halloween festivities!

EUR/GBP 4-hour Chart

After topping out just above .8150 last week, EUR/GBP came crashing down out of its rising wedge. By the end of the week, the pair nearly retested the .8000 handle!

The euro zone continues to be haunted by concerns about Spain and Greece, and this has taken its toll on the shared currency. These debt problems are just like Dwight Howard’s free throw woes - they just won’t go away!

Meanwhile, the pound was relatively stronger last week thanks to good GDP figures. The British economy grew by 1.0% last quarter, after it was projected to post a growth of just 0.6%.

In the short term, I expect this sell-off on EUR/GBP to continue and that’s why I’m looking to establish a short position. Nobody knows whether Greece will be able to land its next tranche of funds and there’s no telling how much longer Spain will hold out on requesting for a bailout.

Luckily for me, there’s a sweet technical setup that could help me land a good entry point!

Not only has EUR/GBP broken out of a wedge (indicating more bearishness for the pair), but it seems to me that a potential head and shoulders formation is emerging on the 4-hour chart. I decided to take out the Fibonacci tool and it looks like the 61.8% Fib lines up neatly with the .8100 MaPs, which was also a major resistance level a couple weeks back. Could it now serve as a resistance point for the second shoulder as well?

Here’s my gameplan:

Short EUR/GBP at .8100, take profit at .8010, stop loss at .8130.

If this plays out as well as I hope it does, I’d be taking home a reward-to-risk ratio of 3:1. Not bad, eh?

My only concern about this trade though is that when I zoom out to the daily chart, I can see that the pair has somewhat been trending higher. I have a feeling that this may finally give way, but I’m far from certain. That said, I’m scaling back my risk and only putting 0.5% of my account on the line.

For now, I just gotta chill on the sidelines and see if price can manage to edge higher and trigger my orders. To those of you joining me on this trade, good luck!