EUR/USD forming bullish patterns
The EUR/USD, like many of the financial markets, has been heading sideways recently. In fact, the pair is trading exactly where it was throughout most of February, as I write. However, there are some potentially positive signs developing for this pair and even an explosive move higher into the summer looks very possible.
The chart below shows the price action throughout this year so far and I could argue that there is a potential inverse head and shoulders pattern forming. This is a particularly bullish pattern and would signal the start of a bull trend. I have highlighted the head and shoulders pattern with the red triangles.
The inverse head and shoulders pattern does not have to be symmetrical in order for it to be valid, but this one is particularly awkward, with only a very small left shoulder. Even so, there are other positive signals on the chart, which is why I’m taking this pattern quite seriously. Note how we have a bullish moving average cross with the purple line just moving above the blue line.
The last time that the purple line crossed below the blue line was in mid-June 2014, and at this point the bear trend began, with the pair falling a full $0.30 over a nine-month period to March 2015.
In the chart above you can also see an upward sloping channel, which I have highlighted with red trendlines. This channel is becoming well-established and, even if the inverse head and shoulders pattern is not valid, the trend channel and the bullish moving average crossover certainly are.
The only problem for bulls in the short term is the black trendline or head and shoulders neckline, starting from the beginning of February, which joins up at the May peak. You can see how over the last few days we have tested this trendline and this has held the move higher perfectly. The price spiked higher and then retreated on two or three occasions at the end of last week and the beginning of this week.
This factor combined with an overbought stochastic is starting to trigger short-term profit-taking at the moment, risking a slide back to first support at 1.1200. Further losses risk a slide as far as the moving averages and strong support at 1.1075/1.1050. Bulls must defend this area to maintain the bullish momentum, but longs will need a stop below the lower trendline of the red channel.
A break below the lower trendline of the red channel would however negate any positive signals for this pair and a break below the May low at 1.0818 is likely to accelerate losses, risking a test of the April/May lows at 1.0519/1.0456.
In order to complete the inverse head and shoulders we do need a break above the black five-month trendline. Whether or not this is a head and shoulders neckline, a break above would be positive for the pair nonetheless. To confirm a positive break of this line I would like to see the pair not only close for two days above, but also see a move above the May high at 1.1466. I would then feel more confident in projecting further gains up to the February high at 1.1532 and then the 200-day moving average at 1.1670/80. (Bear in mind this is a downward-sloping moving average so, by the time we get there, the value is likely to be significantly lower.)
If I have correctly identified the bullish pattern, we could eventually see a move up to the 1.2200/1.2600 area in the months ahead.
Jason Sen – Technical Analyst & Trader
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