Short-term caution required for EUR/USD

I wrote here some time ago about my long-term bullish stance on EUR/USD.  That's a bias I continue to maintain, and I remain long the pair with the idea that the market is only in the early stages of what could be a significant advance.  My target for the next couple of months is the 1.30 area.

In the short-term, however, there are some considerations which would make me cautious about being substantially long right now.  The graph below shows one of the things inspiring a little discomfort.  It is the daily EUR/USD chart with the Bollinger Bands overlaid.  Notice how today's action has driven the market above the upper band.  Now take a look at what happened the last few times that occurred.  In each instance the market retraced.  The last time it was only by a little, but in the previous examples the pull-backs were fairly significant.

At the same time, EUR/USD is in the area of resistance from the September peak, as we can see in the chart below, which pulls back to a longer-term perspective.  I do not think that in the long run the 1.26 area where that top was made will prove a huge resistance point to overcome.  In the short-term, however, it can easily be a contributing factor to a retracement.

As I noted, I remain bullish and long EUR/USD, so I am not in any way arguing for intermediate to long-term players to close out positions, and especially not to go short.  That is something short-term traders could look at doing.  Longer players could potentially reduce their exposure a little right now, but it is strongly recommended that they remain at least partially long and potentially use an pull-back that may occur as an opportunity to add to positions at a lower point.

John Forman is the author of The Essentials of Trading (Wiley).  To celebrate the book's release, today  there is a special 24-hour only promotion with giveaways worth $1000s.  Find out more at www.TheEssentialsOfTrading.com/special-offer.html.