Earlier today, the euro extended losses against the greenback, which resulted in a breakdown below the lower border of the trend channel. Will this bearish development trigger bigger move to the downside in the coming week?
Looking at the charts from the broader perspective, we see that the overall situation hasn’t changed much as EUR/USD is still trading in the orange resistance zone – below the 2010 and July 2012 lows (in terms of monthly closing prices), which suggests that the 2017 upward move could be a verification of the earlier breakdown below these levels.
Additionally, the long-term indicators remain around their highest levels since April 2014. As a reminder, back then, such high readings of the CCI and Stochastic Oscillator preceded bigger move to the downside, which suggests that we may see a similar price action in the coming week(s).
On top of that, sell signals generated by the medium-term indicators remain in the cards, supporting currency bears and further deterioration. This scenario is also reinforced by the short-term picture of the exchange rate.
As you see on the daily chart, EUR/USD declined and slipped under the lower border of the brown rising trend channel earlier today. In our opinion, this is a bearish development, which suggests further deterioration – especially if the exchange rate closes today’s session under this important line.
What could happen if we see such price action? Looking at the above chart, we clearly see a potential head and shoulders formation. Therefore, if EUR/USD declines under the neck line of the pattern (the blue support line based on the previous lows), we’ll see a downward move to around 1.1596, where the size of the move will correspond to the height of the formation.
However, when we take into account a drop under the lower border of the brown rising trend channel and the broader picture of EUR/USD, we think that currency bears push the exchange rate even lower – to around 1.1508, where the size of declines will be equal to the height of trend channel. Taking all the above into account, we believe that our (already profitable) short positions are justified from the risk/reward perspective.