Greece is the word for fundamental trading
Unless you have been living under a rock, you will have noticed that the global financial markets are paying particular attention to Greece. The Greek Prime Minister Alexis Tsipras and his colourful finance minister Varoufakis have had much more than their fair share of time on the news wires. It seems like Greece and the EU are playing the most publicised game of chicken ever seen, both sides determined to strike a deal they deem acceptable.
You may ask yourself how did we ever get to this crisis point in the first place? Well, first and foremost Greece, with the help of a well-known financial firm, ‘fudged’ the figures required by the EU for entry. What’s even more staggering is that seemingly the EU knew about this and turned a blind eye.
This is the main reason Greece has been able to play this dangerous game of chicken with the EU. Not only would there be potential contagion issues with other member states’ debt, there would also be a lot of explaining to do as to why Greece with its history of tax issues and questionable state policies was allowed to get into so much debt.
So what does this mean for you the trader?
Markets move because of two main factors, fear and greed. The fear in the markets all revolves around these key points:
- If Greece defaults on its debt, who is next? (contagion)
- What will happen to the single currency (euro) if Greece exits?
- How will the credibility of the EU and all its banks be affected?
- Who pays for Greece’s debt?
When you put these four simple points into perspective you quickly see that it’s not Greece that the traders around the world are concerned about. It is the fragility of the global banking sector and what happens to all the major currencies outside of the euro if Greece defaults.
I have often said that the market trades 80% of the time technically and 20% of the time fundamentally. The issue of Greece is certainly a clear indication that the tone and direction of the euro is (between technical support and resistance) trading extremely fundamentally on FEAR.
Here is the EUR/USD from the first signs of a Greek debt issue.
This is a monthly chart. It is very rare in technical trading to see so many consecutive M1 red candles. Nine monthly selling candles is a clear sign that fundamental factors (i.e. fear) are moving the markets rather than technical selling.
How can you trade this?
It’s pretty obvious to all that one way or another Greece will have to settle this.
Greece does as the EU and IMF say and pays back the loans and carries on with its austerity measures.
This would be a buy for the EUR/USD, as the ‘markets’ would perceive this as good news and draw more demand into a very oversold, and therefore relatively cheap, euro.
Using the monthly down move we identified we can use a Fibonacci retracement to find where future ‘value’ would be found. This is on the 50% retracement line at 1.20643.
Greece rejects austerity and opts out of the EU forcing its inclusion in the single currency into doubt.
Now it’s not as simple as Greece not paying. There are stages and terms for defaulting on debt. Also there are issues as to how and if the EU can remove Greece from the union. However this is the bad scenario. If Greece continues then fear will drive the euro down so the EUR/USD would be a sell.
In this instance we use the Fibonacci expansions (161.8%) to determine where the EUR/USD could drop to based on the down movement we identified.
The first target would be the previous low at 1.05279. Then the psychological level at parity 1.00000. After this there would be panic selling and the market may get as low as 0.83883 which is the Fibonacci 161.8% expansion level following on from the retracement.
So your options to trade the EUR/USD are clear. Buy if you think Greece will play ball, sell if you don’t. I know what my money is on.
Chief Market Strategist
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The content of this article is the personal opinion of the author and not InterTrader.com. The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.