The EUR/USD pair fell during the session on Tuesday, engulfing the previous session that had formed a hammer. In other words, significant support had been broken down, and I do believe that this pair is going to roll over at this point. This is classic technical analysis, and the fact that the hammer has failed is indeed a very bearish sign.
Looking forward, we can see a lot of volatility in this pair over the next couple of weeks. After all, this is one of the least liquid times of the year, as traders will be heading out for the holidays the later we get into the month of December. Because of this, I think wild swings will become the norm, and the fact that we have so much headline risk right now will only exacerbate that particular problem.
The "fiscal cliff” in the United States will certainly dominate the headlines and move this pair quite often, as will the European debt crisis. It's almost like the markets are stuck in some type of negative feedback loop at this point. It doesn't matter what type of trading you practice, it you simply must understand that we are in a headline driven market currently.
Keep tight stops.
On a break of the candle that represents the Tuesday trading session, I will be selling this pair, but I will also be playing with tighter stops than usual and more importantly smaller position sizes. This is simply because there's just far too much volatility in the marketplace right now to be comfortable risking a great amount of money.
I do believe that eventually we will test the 1.27 level, as it is the bottom of this larger consolidation area. However, there will be moves against the sellers from time to time, as headlines come out from both sides of the Atlantic. If there is some type of deal for the fiscal problems in the United States, you can expect a massive "risk on rally" which of course would show itself in this pair. As for buying this pair, we will more than likely have to see that deal and before it can be done.
