Why Mark Twain thinks a major Euro bottom may be near

The inimatable American author Mark Twain once counseled, “Whenever you find yourself on the side of the majority, it is time to pause and reflect.” This is, of course, great advice for life on the whole, but it has very specific application to trading in particular.

Flash back to six months ago: EUR/USD was the king of the forex world. Rates had just rallied to a 3-year high at 1.40 and the consensus trade was that the rally would stretch into the end of the year. As any experienced trader will tell you, these are precisely the times when a market is most vulnerable to a reversal. Sure enough, the pair reversed sharply off a multi-year bearish trend line and dropped through its rising wedge pattern in May, starting a six-month cascade of lower highs and lower lows down to the low-1.22s.

Now, as we head into the end of the year, the exact opposite situation is developing: the consensus 2015 trade in the forex market is to be short EUR/USD. At first glance, this is a very logical view: the US economy is accelerating, prompting speculation that the Federal Reserve will hike rates in the first six months of 2015, while the Eurozone is struggling with lackluster growth and fears of outright deflation, with most traders pricing in the start of sovereign quantitative easing (QE) program from the European Central Bank (ECB) in Q1.

*A Piercing Candle is formed when a candle trades below the previous candle’s low, but buyers step in and push rates up to close in the upper half of the previous candle’s range. It suggests a potential bullish trend reversal.

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