EURUSD bulls have been on a tear in recent weeks. The single currency is up nearly 1,500 pips since the start of 2017, most of those gains coming on the back of the French election in late April.
At the moment, I see no reason to question whether buyers can continue their winning ways. They managed to break the 1.1670 handle last week and still have more than 70 pips to go before they hit the next resistance level at 1.1875.
With that said, there’s no reason to buy either, at least not for the way I trade. With prices hovering between support at 1.1670 and resistance at 1.1875, buying right now isn’t ideal. The lack of a bullish signal is yet another reason for me to stay sidelined.
But even more unappealing is the fact that current prices are overextended on a daily and weekly closing basis. I mentioned this over the weekend and stand by that assessment.
One way to find the mean is to use a moving average or a combination of averages such as the 10 and 20 exponential moving averages. As you can see from the chart below, today’s price is approximately 180 pips above these two indicators.
On the weekly time frame, the current price is a staggering 400 pips above the 10 and 20 EMAs.
Now, that isn’t to say prices will revert right away. A market can trade above or below the mean for quite some time in a trending market like we’ve seen lately from the EURUSD. But the overextended prices of late are certainly enough to invalidate any notion of buying the pair at current levels.
I may miss out on further upside here, but I’d rather do that than chase a runaway train.
So where might the EURUSD be heading?
As mentioned above, we could see a retest of the 2010 low at 1.1875. To the downside, I’ll be on the lookout for a pullback into the 1.1490 handle or even 1.1300.
I may even consider shorting a retest of 1.1875 or a close below 1.1670, but only in the event of a confirmed sell signal on the daily chart.
One thing I do know for sure is that I won’t entertain a long position here without first seeing a reversion to mean. A retest of 1.1670 could accomplish that, but the ideal scenario would be a pullback into 1.1490 or even 1.1300.
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