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EURGBP Confirms Head and Shoulders, Targets 0.7386

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Perfectly formed reversal patterns are a rarity in any market. So when one appears, it’s important to position yourself in a way to take full advantage but without violating your risk management principles.

I mentioned the potential for a head and shoulders pattern on EURGBP on May 4th as well as in the last couple weekly forecasts. That potential is now a full blown opportunity after yesterday’s 140-pip landslide.

But traders who are waiting for a retest of the neckline as new resistance may be in for a disappointment.

Why do I think so?

A look at yesterday’s close relative to the 0.7700 handle tells the story. Not only did the Euro cross confirm the reversal pattern, but it also battered its way through a critical support level that dates back to mid-January.

This break below 0.7700 creates a wrinkle in the more favorable entry method for trading the head and shoulders reversal. Instead of watching for a retest of former neckline support as new resistance, we’re forced to watch for sell signals below 0.7700.

Now, here’s where patience becomes a vital asset. As you can see from the chart below, today’s session has already retested the new resistance level.

But was there a favorable sell signal?

In my opinion, the answer is no, and it has nothing to do with a lack of bearish price action. A quick study of mean reversion and noticing how little time EURGBP spends this far away from the 10 and 20 EMA is a sign that some consolidation is likely before sellers can push prices toward the next support level at 0.7525.

There is, of course, the chance that the pair doesn’t consolidate or pullback from here. But as always, I’d rather risk missing an opportunity than chase an entry and risk getting stuck on the wrong side of a market.

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EURGBP confirmed head and shoulders on the daily chart

Leave a Comment:

18 comments
Carol Capner says

It took an awful long before it moved, but I stayed patient – had 3 standard lots on the daily, so did quite well.

Reply
    Justin Bennett says

    Very nice. Well done, Carol. 🙂

    Reply
      Chukie says

      Yes Justin it did. One of the key components of your analysis is patience. Normally use moving averages but since following your blog saw it easier to identify trend lines and s/r lines. the combo is really good. one quick unrelated question pls. is that a pin bar formation on the GBP/AUD daily and will a sell be in order after it closes below the 2.01238 resistance line. Thanks.

      Reply
        Justin Bennett says

        Chukie, I’d have to look regarding GBPAUD. However, I’d be unlikely to sell into the recent surge higher.

        Reply
petrus says

very good analysis as ussual. thank you. but I want to hear your opinion about market gap.
As daily price action trader, we are prone to suffer big losses when price move against our predicted direction and make a big gap move such often happens in monday opening. how to handle this matter? though we have put our stop loss in place we still suffer big loss bigger than our stop loss when prive make a big gap pass over our stop loss, right?

Reply
    Justin Bennett says

    Petrus, the best way to avoid weekend gaps is to stay away from holding currencies over the weekend that have scheduled event risk. Stops don’t guarantee anything in the case of a large gap but check with your broker.

    Reply
petrus says

where the stop loss should be placed? 0.7950 (round number) over the prevoius swing high, right?

Reply
    Justin Bennett says

    That one is up to you.

    Reply
yusphate says

nice analysis bro

Reply
    Justin Bennett says

    Thank you. Glad I could help.

    Reply
Earl says

Hey Justin,

Looking at the chart, i think a pullback is currently in play. Do you think its ok to enter now or wait for the price to touch the new resistance trend line?

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Earl says

wow, 82 pips move after retracement…. Yet to enter. I wonder if it could break through the next resistance with ease

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Earl says

Good job on this analysis Justin. Price action always comes through 95% of the time

Reply
    Justin Bennett says

    Thanks, Earl. It does work quite well.

    Reply
John Taylor says

Justin,

My EURUSD trade went against me, such is trading. I then saw your article here for the Head & Shoulder pattern on the EURGBP. I waited for the market to retest the Neckline Break and went Short at 0.7735. I managed to secure 115 Pips total and wanted to Thank You for the “heads” up. I will be signing up for the DPA course soon. I am a trader who has been around the block and has tried pretty much all forms of trade strategy, indicators and software vendors. Price Action is truly the only way for me, especially from the Daily Chart perspective. So, your trade philosophy and mine are in synchronicity. What I appreciate at this early stage is your proficiency, clear cut methodology and what appears to be a genuine concern for all of your students to succeed. There are few Forex mentors (Teachers) who put their money where their mouth is. Thanks and I will see you in the paid areas once I do sign up!

Reply
akim says

i checked the pattern EUR/GBP I noticed the trade hit stop loss, am i correct

Reply
    Justin Bennett says

    Akim, only you can answer that question.

    Reply
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