Tuesday, December 20, 2011
Most folks think it's crazy to buy the euro right now.
Europe is in a recession. Austerity measures will hamper growth for years to come. One eurozone country after another is teetering on the brink of collapse. The whole European Union is ready to dissolve.
So as crazy as it sounds, now is the time to buy the euro.
Before you dismiss this trade as an idea brought on by one too many brandy-laced egg-nogs at a weekend holiday party, take a look at this chart of the euro...
This chart plots the euro against its Bollinger Bands (BBs). Bollinger Bands help define the most probable trading range for a security. Any move outside the BBs indicates an extreme condition – one that is likely to reverse direction.
One of the most successful trading strategies this year has been to patiently wait for extreme conditions and then to bet on the other side. And today, we have a good technical argument in favor of buying the euro.
The blue arrows on the chart point to the five times this year the euro has broken below its lower BB. Three of the four previous times led to a bounce back up to the upper Bollinger Band – an average gain of 5% in less than one month. Even buying the short-lived bounce in September, in which the euro fell to a new low in early October, generated a profit for anyone who held on until late October.
The euro fell below its lower Bollinger Band last Thursday. So we have another "buy" signal for the currency everyone loves to hate.
This isn't a long-term signal, of course. Nobody in their right mind would buy the euro right now as a long-term investment. But the short-term conditions have hit such extreme oversold levels that a bounce is likely.
If you're looking for a fast trade to help pay for some of those holiday shopping sprees, buying the euro right here looks like an idea that just might work.
But be sure to sell it when it runs back up to its upper Bollinger Band.
Best regards and good trading,
If you want to profit off the short-term direction in stock prices, be sure to familiarize yourself with some of the indicators Jeff has shared with Growth Stock Wire readers. He's timed perfect market calls using sentiment indicators, summation indexes, and bullish percent indexes, and recently shared the company he uses as the newest market timing indicator.