The time has come to delve further into what could be an 800 pip reversal pattern on the EURGBP. I’ve mentioned this potential bearish reversal formation several times over the past few months, but the pair had never been so close to capitulating as it was yesterday.
Tuesday’s surge in the pound led to an intraday move of more than 200 pips for the EURGBP, the largest since November 9th of last year. It also triggered a retest of the neckline of what could be a ten-month reversal pattern.
This particular head and shoulders has several swing highs that form both the right and left shoulders. This isn’t uncommon for a structure that spans such a long period. Similar formations on the NZDJPY and CADJPY between 2014 and 2015 come to mind.
I do want to stress that this head and shoulders remains unconfirmed at the time of this writing. As such, I will continue to refer to it as a potential reversal rather than an outright signal.
The neckline, which is our trigger to confirm the pattern, comes in at 0.8330. A daily close below it would establish a selling opportunity on a retest of the level as new resistance. Keep in mind that there is another horizontal level closer to 0.8300 that could also become a factor.
Because the spike high occurred as a result of the October 7, 2016, pound flash crash, the measured objective is a bit more subjective than usual. For this reason, I’m using the October 11th high at 0.9140 to determine the measured move to stay conservative.
When measuring from the neckline at 0.8330 to the 0.9140 high, we get a measured move of 810 pips. If we then measure 810 pips lower starting from the neckline, we get an objective of 0.7520.
With that said, there is a long-standing level that could become a factor before 0.7520 is realized. The level in question is former channel resistance that extends from the 2008 high at 0.9802.
But while this level may become a factor before the measured objective is reached, there is still plenty of room to the downside should the 0.8300/30 area fail.
As for support levels on the way down, the first area of note comes in near 0.8100. This is the April high from last year and is also the location of the post-Brexit session close which may have left an open gap depending on your broker.
A close below 0.8100 would pave the way for a move toward the 2012 low at .7760. Should buyers take prices higher before breaching the neckline, I suspect sellers will be camping near the 0.8420 area.
Keep in mind that with the first round of the French elections coming up on April 23rd, volatility is all but guaranteed to increase. As such, I’ll be on the sideline for the remainder of this week and will also use relatively small positions to scale in should a favorable setup materialize.
Want to see how we are trading this setup? Click here to get lifetime access.