When prices contradict fundamentals, potential trades appear. The strength in Euro between Christmas and New Year that drove EUR/USD above 1.3800 seemed to go against the fundamentals. Stronger growth in the US economy, and USD support provided by slowing stimulus, could be enough to drive EUR/USD significantly lower. Of course, any traders who sold in this period are now looking at substantial profits.
Traders with this view who were on holiday may now be wondering where to enter on the short side. Interestingly, EUR/USD has weakened over the last 48 hours, despite positive European PMI's (France and Italy excepted) and surprisingly strong German retail sales. Fortunately, this brings the pair to a key support/resistance level:
Note the potential / support resistance at 1.3650 and 1.3570. These levels define the "zone" - over the last few months, where EUR/USD has broken through either level, significant moves often followed . A drop through 1.3570 may provide a shorting opportunity.
The Bollinger bands introduce a note of caution. EUR/USD may be "stretched" on the downside at the moment. Rather than a straight drop through, we could see a bounce off the lower band. If it respects the resistance at 1.3650, it may be an opportunity to sell at higher levels than current market.
To cover both eventualities, I'm looking at two trades:
A sell Stop Entry order at 1.3560, with a stop loss above 1.3570
A sell Limit order at 1.3638, with a stop loss above 1.3650