By Greg Holden
Expectations this week for the world’s primary currency pair, the EUR/USD, may be summed up by viewing the daily chart’s technical formation. Beginning with last year’s record low price of 1.1875, this pair has been developing a long-term, upward angled, “head-and-shoulders” candlestick formation.
As this formation appears to have finalized over the last few trading days, can we now expect a long-term retracement back towards the 38.2% Fibonacci support line at 1.3034?
If you look at the chart below, it is possible to see supporting indicators of such a move. The MACD/OsMA reveals a clear bearish cross near the 0.0100 level, typically a solid indication of an impending downward turn.
The Relative Strength Index (RSI) and Stochastic (slow) also show a sharp cascading price movement, suggesting added momentum to last week’s bearishness.
What is worth noting, however, is the speed of the descent being experienced in these latter two indicators. This movement will likely see both indicators reaching the over-sold territory rapidly, adding upward pressure to this downward correction and potentially halting the long-term retracement expected from the head-and-shoulders formation.
If we are to understand this expected technical move, we may be better off breaking it into two phases. The first phase may see the price of the EUR/USD descending to the 50% Fibonacci level at 1.3391, at which point it is going to meet strong support. This phase should see some range-trading behavior between 1.3390 and 1.3500 over the course of several days as major investors test the resolve of the head-and-shoulders pattern.
If the bears can outbid the bulls during this first phase, then we should see the head-and-shoulders formation continue for the next few weeks as the price retraces towards the neckline (highlighted on the chart below). The 38.2% Fibonacci support level represents the long-term target of this pair. But short-term traders should keep their trades focused on the first phase, which will no doubt be shakier than the second.
EUR/USD Daily Chart
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