With all of the euphoria building on Wall Street since the start of 2012, many investors seemingly forgot about the lingering, unresolved Euro zone debt drama. Despite the optimistic sentiment building on the home front thanks to encouraging data releases, the global economic recovery remains largely influenced by the health of the fragile currency bloc overseas [see Euro Free Europe ETFdb Portfolio]. Traders may wish to capitalize on this largely uncertain outlook by taking note of developing technical patterns in one of the most popular currency ETFs available: the CurrencyShares Euro Currency Trust (FXE).
With uncertainty comes volatility, and for traders, this an opportunity to capture potentially hefty gains in a relatively short amount of time. Nonetheless, market timing is everything, and placing the right buy order is just as important as knowing when to take profits and cut losses [see ETF Insider: More Earnings, More Volatility]. Fears over Spain’s towering debt resurfaced last week as yields on government bonds spiked after the country’s Prime Minister warned of the headwinds that could arise given the struggling economy and conservative austerity measures in place.
Lyn Graham-Taylor, strategist at Rabobank, commented, “It is looking more and more likely that Spain is going to have some form of a bailout. Assuming there is not an (ECB) intervention you would not see a cap on Spanish yields, they would just keep increasing” [see also Three ETF Trades For The Next Euro Zone Debt Crisis].
Resurfacing worries have undoubtedly translated into volatile trading for the euro in the currency market; likewise, FXE has been stuck in a frustrating trading range since it bottomed out at $125.75 a share on 1/13/2012. Since then, this ETF has been oscillating between the $134 and $130 levels; notice how this ETF tends to bounce off support near the blue line, and any move to upside is capped at either the dotted red line or at major resistance near $134 a share (solid red line). What’s worrisome is that FXE has been unable to climb back above its 200-day moving average (yellow line) since breaking below it back in late October of 2011 [see 3 ETFs For The End Of Operation Twist] .
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The back-and-forth price action in FXE so far in 2012 has likely discouraged long-term investors from establishing a position. As such, we feel that the best way to take advantage of the ongoing uncertainty is to simply trade the established range; this means buying low near support at the blue line, and taking profits as FXE nears resistance at the red dotted line or the solid one, depending on individual risk preferences [see also 5 ETFs For The Earnings Bull].
At the moment, FXE appears poised to climb higher, although caution should be exercised as any move to upside could encounter resistance between the $132 and $134 price levels; likewise, a break below the $130 level would call for re-assessment of the ongoing trend. Traders of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: No positions at time of writing.
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