EURUSD: Textbook Head and Shoulders Pattern Failure Opens Door To Lower Prices

The Euro has been one of the standout performers of 2017. The year opened with calls for parity from major financial institutions, however stronger European data and decreased political instability saw the EURUSD rally all the way to 1.20 or so. It also helped that the USD saw nothing but red for most of the year. This blog made the call back in May and June to long the Euro, which worked out nicely for anyone who was in the trade.

We are at a turning point, however, as divergent Central Bank policy may see lower prices for the world’s most widely traded pair. This, combined with a classic head and shoulders chart pattern, gives us a strong reason to be biased towards a EURUSD short.

Combining fundamentals and technicals

Traders should look for confluence, that is, when more than one indicator or signal occur at the same time. The most powerful setups occur when both the fundamentals and technicals align. A sell setup in a downtrend when there’s a fundamental reason to be short is more likely to work than a buy setup in the same downtrend. It’s a matter of aligning as many factors in your favour at once.

Textbook Head and Shoulders Pattern on the EURUSD.

The daily chart shows the textbook failure of a head and shoulders pattern. This pattern is important for a couple of reason. Firstly, it formed above the 2015 high of around 1.17, which represented a significant SR level. Secondly, it’s failure comes at a time where the interest rate outlook between the US and EUR is diverging. The break of the neckline was very significant, and puts price back below the 1.168/1.17 resistance level. Below this level we open the door to 1.1350, and perhaps 1.10 over the next 6-12 months.

The structural problems in the European Union haven’t changed, if political issues raise their heads again we could see this downtrend pick up pace.