FXE Is Oversold: Trade The Bounce

by on May 21, 2012 | ETFs Mentioned:

Predicting the future is not easy, it might even be impossible. However, anticipating the recent wave of fear in the markets should have been a no-brainer. Seriously. Anyone with a 2012 European parliamentary elections calendar could have speculated (with great certainty) that debt drama would likely resurface; in early March of this year we gave ETF investors a heads up that the next bump in Europe’s road to recovery could come as early as April. The stars aligned as faith would have it and Greek elections welcomed back the bears [see 3 ETF Trading Tips You Are Missing].

If you missed (or got burned by) the recent Euro zone-inspired sell-off, consider the chart for the Rydex CurrencyShares Euro Currency Trust (FXE) once again as it may offer some compelling trading opportunities in the foreseeable future. Keep in mind that headlines from the overseas currency bloc have a tendency to sway the markets in unpredictable ways, and as such, the technical analysis offered below should be interpreted accordingly [see also Euro Free Europe ETFdb Portfolio].

Chart Analysis

Since breaking below our outlined support level at $130 a share on 5/8/2012, FXE has gone onto retest its 1/13/2012 low near the $126 level. Selling pressures have cooled off and this ETF appears to be holding support as it has kept afloat above $126 a share for three consecutive days. From a technical perspective, FXE appears oversold and overdue for a bounce higher;  judging from the magnitude of this recent downturn coupled with the fact that this ETF appears to be holding at a major support level, we feel that FXE is poised to recover some lost ground in the foreseeable future.

Click To Enlarge

Furthermore, the stochastic momentum index (bottom indicator) confirms that FXE is in oversold territory; notice how this indicator is flattening out and ready to turn higher, although caution should still be exercised as further downside for the euro is by all means a possibility [see also 3 ETFs For A Euro Zone Double-Dip].

Trading Outlook

Assuming the current support level holds, traders buying in at these levels need to exercise prudent risk management. For long positions, we advise setting a stop-loss order at or around $125 a share, since a break below this level would be quite worrisome because the next level of support is all the way down near $120 a share. In terms of upside, any major multi-day rallies in the euro could be used as an opportunity to lock-in gains in FXE for conservative traders. We advise setting a limit order at or below $130 a share (blue line) for conservative short-term traders [see also 5 Simple ETF Trading Tips].

Those who feel that FXE is way oversold may wish to hold onto their positions longer, although caution should be exercised as this ETF nears $132.50 a share (dotted red line), seeing as how this is a major resistiance level that it has failed to summit thus far in 2012. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.

Follow me on Twitter @SBojinov

[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]

Disclosure: No positions at time of writing.