On Friday July 23, the EU will reveal the results of the bank stress tests for 91 major European banks comprising about 65% of total assets. Several large banks are expected to fail and require potentially significant recapitalizations. If so, the EUR is likely to come under pressure as additional sovereign liabilities are seen to undermine deficit reduction plans. If none or few banks fail, the market is most likely to conclude that the tests were not stringent enough and significant doubts over the strength of the sector may resurface, also adding pressure to the Euro. The risk to this outlook is that a sufficient number of banks fail, but are seen to be able to recapitalize using existing government bailout funds, and markets breathe a sigh of relief and the Euro recovers further.
On the technical side, today's price action has generated a 'bearish engulfing line,' suggesting a reversal lower after an advance. The highs for the rebound look to have been contained by the 1.3665 38.2% retracement level of the decline from the May 21 high. A bear flag consolidation channel is evident, most clearly seen on the 4-hour timeframe, potentially highlighting downside prospects. Lastly, daily stochastic readings look to be topping out in overbought territory.
The strategy will look to sell half of a short EUR/CHF position at current market levels of 1.3550, and to sell the second half on remaining strength to 1.3640, just below recent highs, for a short average rate of 1.3595. The stop loss will be at 1.3740, just above a key low on June 9. The take profit objective will be for 50% at 1.3200, just above daily low close for the most recent decline. The second half will be kept open for an eventual move below 1.3000. A more conservative strategy would be to wait for a break of the bear flag bottom at 1.3460/70 (and rising) to confirm the downtrend has resumed, before going short.
No comments:
Post a Comment