Just to gain some perspective, the chart below shows where the €URO was trading one week ago.
Volatility picked up, specially after Thursday Afternoon in which news from a possible dissent in Greece regarding the austerty measures could jeopardize the conclusion of a Troika deal/EU-IMF loans. Friday ADP report provided a boost in the US Dollar, reflecting further downside in the €URO, currently trading @ 1.2827, as I´m writing this post 8:30PM, ET.
I tend to read the type of pronounced price action to the sell side -as noted on the latter leg of the selloff- as usual stop run. However, the move was particular, in the sense that it was faced by an increase in participation of buyers, as noted below.
Usually, the referenced price behaviour faces the opposite of the situation noted above: intense downward pressure is usually faced by an increase in seller participation running against already established long positions, as noted on the chart below. This is the effect of shorts looking for liquidity to continue the move. Briefly, the selloff stops because there no more stops to run, liquidty dries up, and price proceeds to move in the opposite direction, also looking for liquidity.
In lieu of the above, I´m working with some alternatives in which the current situation might be subject to materialize:
a-) The increase in longs against the downmove shows that long inventory is building up even when price is moving against it. Thus, an increase is the participation of buyers will lead to an increase in price for EUR/USD. Since there is no short inventory above it, there would be no clues for me to establish levels in which the price will action will be challenged:
a.1) The move could be short lived, providing a partial retraction in the wake of a bigger downmove.
a.2) Another scenario, would be that this area will mark a temporary bottom, which at the moment I´m not seeing. Price action and an important buyer´s response would be clues I´ll be watching, possibly during tomorrow the morning update.
In either case, levels to watch as areas in which a move up might be challenged:
Key price points to watch (POC´s)
1.2965 (key above, for further upside)
It would be a sign of strong rejection of lower value areas if by the next day or two, price is trading above 1.30´s – Important have in mind the upcoming US Presidential Elections due on Tuesday, November 6. So far, lower areas of value have been accepted.
Alternatively, we could be in presence of commencement of a bigger move. The strong move we had over the last few days, denoted by a vertical developent, as marked on the chart below, can provide a hint towards this scenario. I have pointed many times to respect the importance of this type of price action regarding future direction in continuation of the move. In that sense, the buying that I´m seeing at the moment, could be the trigger of a big stop run, subject to be initiated.
Thus, the upside areas noted previously to look for a bounce. Both 1.2873-1.2885 & 1.2894-1.2911 are weak areas, which should provide -at least- some rotation. Further above, is more defined 1.2930-1.2949 are, which sould present some further possible selling. I do not see much above until 1.3043-1.3070, unless an important seller response is developed.
Following the downside scenario, it is important to note that price has approached a key area, in which the move towards 1.3150´s started to develop. That key area 1.2747/1.2806 (POC 1.2782) is quite important and could open the door to further downside.
In the chart below, Yellow lines represent key swing zones, in which bigger moves were initiated.
So far, price as the bottom of a 400 pip range 1.2750´s-1.3175´s – Unless a see an important, steady and rapid buyer´s response, or prices find a choppy -although firm- footing in this area, I´ll be leaning towards lower prices.
Lower areas of value to be aware of
1.2784 POC is key.