The Euro story - Recovery

Something has finally happened in the Euro. Lets
first look at what we were doing before. We traded
the Euro short on the classic trendline break,
got a 200 pip reward and closed our position
after reaching the reward level.

We then said we will wait to see if it goes further
down or goes back up. I am showing the annotated
chart below to explain all this in a simple picture.



This is the daily chart with the Fibonacci levels
and annotations of what we were doing. The Euro
held support at the March 23 swing low on May 4
and has since been going up on mild volume. We
will now switch to the hourly chart.

Remember, we said that when it does start to go up,
it will encounter resistance at the inflection point,
which was the point where it did the classic trendline
break and which also, once the swing low support
held, was close to the 50% retracement level of
the fall to the swing low. The next annotated chart
shows this.



Please follow the datewise comments boxes till you
come to 5/16. Everything should be clear. Please note
the lack of volume since 5/16 as we await confirmation
of whether the inflection point, which I mentioned
in a previous post would be strong resistance, has
now become support.

When will we know it ( in the sense that of course
one never really knows anything but when can we be
sanguine about it ) ? Remember what happened when
we went short. Here it is -

1. A significant chart action takes place with volume.
2. Our attention is drawn.
3. We wait to see if it is a head fake.
4. We get confirmation that the action is not a fake.
5. We take action, with a suitable risk-reward ratio.

For the above 5 steps to play out now, following will
have to take place -

1. The inflection point must hold on a test, with volume

Once that happens, where will we go long and what will
be the risk-reward? For that, we need a different chart.
Here it is -



The chart clearly shows how the rising trendline and
the inflection point will intersect to form a strong
test area. If this area is tested with volume, we
will have to surmise that the trendline break on
4/24 is now history and we will at least be going
back to the 4/23 high and maybe beyond.

If the trendline/inflection point is not tested,
we will be in watch mode. One possible situation
could be that it will move up on low volume to
the 4/23-4/24 highs where there is the strongest
resistance.

In the next post on the Euro, we will avoid these
number crunching exercises and try to distill exactly
what we have been trying to do. This will lead to
our 3rd law of trading - "Support becomes resistance;
resistance becomes support".

Thanks for your viewership!