The EURUSD roller coaster ride continues. The directionless single currency was rejected during yesterday’s advance, but not before carving out a bearish pin bar of sorts at a former support level. I mentioned this level on Monday as one to watch after the pair had broken to the downside.
The idea was to watch for bearish price action on a retest of the level as new resistance. Although yesterday’s 4 hour bearish rejection bar fit the description, I held off on releasing this very commentary due to the unfavorable close of that 4 hour candle.
Fast forward to today and we can see that the bearish price action had merit after all and probably deserves our attention. Not because there is an immediate trade setup, but because the weakness over the last 24 hours puts EURUSD dangerously close to the seven-month support level that we have been talking about for weeks.
It should be noted that this is not unfamiliar territory for the pair. Since March, EURUSD has tested channel support on four separate occasions while only testing resistance twice during the same period.
Is this imbalance a sign of inherent weakness or is it pure randomness?
Time will tell, but in my experience when one level within a channel gets more attention than the other, it often leads to a break in that direction. This is especially true when the prevailing trend is in favor of such a break, as it is in the case of EURUSD.
My mid to long-term view remains weighted to the downside as I see the price structure that has been in place since March as a simple consolidation pattern with bearish implications. In other words, a potential bear flag that may indicate a continuation of the downtrend that began in May of 2014.
As for yesterday’s price action, it would appear that the latest rally that began during Wednesday’s session may be running out of steam. Of course only time will tell the real story, but a break below this seven-month channel would certainly attract a lot of attention from those who remain bearish on the single currency, myself included.
That said, a break below a level that has been in place for seven months will not come easily. Therefore it’s important that we remain patient and wait for a convincing close below the level before considering an entry.
Then again, there is always the possibility that the pair will catch a bid and rally from current levels, in which case I will stay on the sidelines until a favorable opportunity presents itself.
Summary: Watch for a selling opportunity on a daily close below channel support at 1.10. From there, key support comes in at 1.0820, 1.0658 as well as the current 2015 low at 1.0470. Alternatively, a daily close back above the trend line that extends off of the August 7th low would negate the bearish bias in the short-term.
