Yesterday’s drop in the EURGBP is a perfect example of why I don’t buy upside breaks of bullish exhaustion patterns. I first commented on the 4-hour rising wedge on August 16th. At the time the pair was trading at 0.9104 and was well within the confines of the structure.
Instead of breaking lower as is often the case with a rising wedge, buyers cleared resistance on August 23rd. Bulls then held their ground between August 24th and 25th when the 0.9200 area was tested as new support.
On August 28th we looked at a new challenge for buyers. The pair hadn’t quite carved the upper boundary of the ascending channel, but buyers seemed intent on testing the area as resistance.
Sure enough, Tuesday’s price action respected channel resistance near 0.9280 on a daily closing basis. It even formed a bearish rejection candle of sorts with a 41 pip upper wick.
That rejection from the 0.9280 area led to yesterday’s selloff. It also puts prices back inside the 4-hour rising wedge pattern we discussed just days ago.
From here it seems the highest probability trade would be a daily close back below 0.9144. This is the 2016 high, so if sellers can manage a daily close below it, we could see the EURGBP give up 100 pips and perhaps more.
You could attempt a short on a close below wedge support (see the August 28th commentary), but achieving a favorable risk to reward from there would be difficult. Of course, that assumes you aren’t already short as I know some of you are.
A daily close below 0.9144 would pave the way for a retest of channel support near 0.9030/50. We won’t know the precise target until sellers secure a daily close below the 0.9144 handle.
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