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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