Source: ForexYard
On January 10, after the EUR/USD pair saw a third failed attempt to fall below the 1.2870 support level, a bullish correction took place, and the pair gained about 580 pips within four trading days. Is it possible to predict such turn of events? Let’s try to answer this using technical analysis.
First, please observe the EUR/USD 4-hour chart below; this will be the main tool we’ll work with in this article.
Now, let’s look for all the signs that could have driven us to suspect that a bullish reversal is about to take place.
• As written on the opening paragraph, the bullish correction only took place after the pair saw several failed attempts to fall below the 1.2870 level. When a currency pair sees such a strong support level – traders must question whether the market actually desires to see the pair traded below this level. It is no coincidence that the pair’s bearish move is blocked over and over again at the exact same level.
• Look at the Slow Stochastic indicator. First, a bullish cross was completed below the 20-line. This often means that a bullish correction might be impending. In addition, no less than three additional bullish crosses took place afterwards, all within a very short period of time. The first bullish cross has signaled that a bullish move might take place, the other bullish crosses that followed have signaled that the market is reluctant to let the pair resume to a down-trend.
• The MACD is probably the easiest to analyze. A bullish cross at the bottom of the section is very likely to predict a bullish reversal. As you can see, the MACD has never switched its indication, and continues to provide bullish signals.
• The Relative Strength Index (RSI) has provided two significant bullish signals. First, it rose above the 30-line, reaching out of what is referred to as the over-sold area. When the RSI crosses the 30-line and continues to point up, it usually mean that the currency pair will follow its lead. The second signal was given once the RSI failed to fall below the 70-line. If the RSI would have fallen below this level, it should have warned us that the bullish move might have reached its end. However, once the RSI reversed its direction, and once again pointed upwards – it signaled that there is still significant bullish pressure on the pair.
• The timing of the bullish correction could have been predicted using the Bollinger Bands. When the Bollinger Bands are tightening, it’s a clear signal that a sharp movement is likely to take place. Considering all the bullish signals written above, traders could have suspected that the Bollinger Bands are signaling that the bullish correction will take place soon.
• Last but not least – sophisticated traders could have noticed that a double top pattern has begun forming on the chart. Once the pair crossed the 1.3020 resistance level, the beginning of the pattern could have been observed by traders, and once the pair crossed the 1.3200 resistance level – traders could have seen it as a signal that the pattern will be completed, meaning that the pair will reach the 1.3450 level.
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
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