EUR/USD has hit a major inflection point-a level I’m describing as a Critical Mass which could send the euro toward 1.3500 and then to the upper 1.38’s.

I last posted an article on July 27 entitled “The End of the Crisis Era” in which I said that “what we’re likely to see going forward are stocks trending higher and the dollar trending lower.” I based this on the idea that the European Bank Stress Tests marked the end of an era where systemic risk was a serious threat.

I ended the article by saying “if you’re a forex trader, sell the dollar and go take a vacation. And don’t under any circumstance put a stop on those trades.”

In reality, traders should always trade with stops. I do not at times, but only when I have a belief that there has been a fundamental shift which will be strong enough to get price moving in a trend (or continue the present trend).

In any event, here’s why I think that EUR/USD is at Critical Mass; with the close of trading on Aug 2, the euro is now over the 38.2 Fibonacci retrace of the decline from Nov. 25 2009 to June 6, 2010. And once price closes above this level (or below if price is trending down), there is a very good chance to see it eventually hit the 61.8.

Fibonacci also gives us something else to use-important support levels which serve as entries. Take a look at the smaller fib that I’ve been using to measure the retrace of the last decline from April 12 to June 7. Besides the 38.2, there were times when the 14.6 and even the 50 (which technically isn’t a number in the sequence) could have also been used to “buy low.”

Going forward, there’s a chance to be presented with just such an opportunity. While nothing in forex (or in life for that matter) is ever guaranteed, a close above the critical 38.2 will provide a good entry if we get lucky enough to see price touch that area in a search for support on its way to the 61.8.

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