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Mexican Peso Rally Could End Here

The June Mexico peso futures contract bottomed at 0.05111 in February, and then rallied. It bounced to a high of 0.05809 on March 31. Following the high the price is moving sideways, more recently peaking at 0.05784 (April 20), with support between 0.05515 and 0.05537. Despite the rally, the longer-term chart shows that this rally intersects with a long-term descending trendline.

While the price could continue to rally, preference is given to short trades, because if the downtrend does continue trades near current levels offer attractive reward:risk ratios. Trading the rally (buying) goes against the current downtrend.

Figure 1. Mexican Peso Futures, Continuous Daily Chart

Here are a couple strategies for trading the downtrend.

  • Enter short at 0.05724, with a stop loss just above 0.05809. That entry point is based on the most recent short-term reversal point, when the price fell below the April 20 day low.
  • Another trade: watch to see if the price consolidates between 0.05784 and 0.0568 for the rest of April 22. If it does, then take a short trade if the price drops below 0.0568 on April 24/25 or after (assuming it doesn't move above 0.5809 first). Stop loss is placed just above 0.05809.
  • The more common, but least preferred method, is to wait for the price break through the support area of 0.05537 to 0.05515. With a stop loss just above 0.05809, this creates the biggest risk (difference between entry price and stop loss) of the three trades.

With the first two strategies the support area can be used an initial price target. That way, even if the price doesn't continue dropping below support, a profit is still made. If the price drops through support, the next target is 0.5260, which is just above the February low. More aggressive traders can place a target below 0.05111.

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