Over the weekend I mentioned the possible formation of a head and shoulders pattern on the EURGBP. The pair is just now carving out what could be the right shoulder of the structure, so it’s far from complete.
However, yesterday’s session broke a key level at 0.8625. The area had held as support for four straight sessions but finally gave way in the face of recent selling pressure.
A look back to mid-November of last year shows how the 0.8625 handle also acted as resistance for six straight sessions. So yesterday’s close suggests that this level will begin serving as resistance moving forward.
In fact, we can already see how the level is attracting sellers so far today.
But there’s a better way to play this level than simply watching for bearish price action from 0.8625. A glance at the 4-hour chart below shows a trend line that extends from the December 15th low at 0.8330.
So far, the EURGBP is respecting this level on a 4-hour closing basis. As such, a close below this trend line would signal the start of a turn lower.
There are a few minor areas of support on the way down, but the next key level of interest is 0.8330. This is also the neckline of what could be an 800+ pip head and shoulders pattern.
From here I’ll need to see a 4-hour close below trend line support. A sell signal following such a break could offer an opportunity to ride the pair lower toward 0.8330 and the completion of the right shoulder.
And if the larger pattern should confirm in the coming weeks, we could see the EURGBP eventually slide as far as the May 2016 lows at 0.7560.
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