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I’m not one who normally attempts to catch the proverbial “falling knife”, but occasionally technical setups emerge where I think it makes sense to take a shot.  Now, that doesn’t mean I would ever advise going all in, but rather take a risk-mitigated position that has high upside potential if we get the reversal we’re looking for.  In my opinion, we have such an opportunity currently materializing in the Euro currency.

Taking a look at the chart below, we can see that the Euro futures have had a precipitous fall throughout the month of July.  In addition to the economic data out of the Euro zone being less than stellar over recent weeks and yesterday’s Russian sanctions possibly impacting European economies, we’ve seen the US dollar index have its largest monthly gain since February of 2013.  All of these factors have certainly contributed to the Euro falling over four handles since making recent highs on July 1.  However, I believe that the extent of the selling could be overdone.

Additionally, we have two important technical metrics that are overlapping at current levels – the 133.70 area is an important Fibonacci level and also happens to be a few ticks from the lows established in November of 2013.  As such, if there was an area to make a play for a retracement of this recent move down it may be right now.

As alluded to above, the business of forecasting tops or bottoms can be a fool’s errand.  The premise of this article is certainly not to put all of our eggs in the Euro bull camp.  Rather, call attention to a potential opportunity to take advantage of a technically oversold market in the near term.  The scenario outlined above is very conducive for an option or option spread strategy.  This could allow traders to have some leveraged upside if we do get a bounce in the near term while limiting their risk to the downside, even if the market plummets to new lows.

Questions or comments?  Contact Trent directly at 312-756-0932 or at twagner@tradewithfox.com.  Trent can be seen as a regular contributor on Fox Business and is the author of a newsletter, The Weekly Options Trading Report.  For a free trial of the newsletter, click on the link below:

 

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*Past performance is not indicative of future performance.  Trading futures and options involves substantial risk of loss and is not suitable for all investors.

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