The EURUSD continues to struggle after closing below ascending channel support on September 25th. The channel floor that extends from the April 17th low had directed the single currency for the better part of 2017.
Last week’s breakdown wasn’t a surprise though, at least not for those who have been following along. We started discussing the potential for a move lower in early September.
There were actually three warning signs that a turn lower was likely.
1. Erratic price action
Something I’ve noticed over the years is that price action often becomes erratic at turning points. It’s partially due to the profit taking that occurs. More specifically, the “smart” money begins pulling out.
The other half of the equation are the latecomers. These are retail traders and others who are late to the party. Unfortunately for them, they are absorbing the sell orders from those who are booking profits near the top.
Notice how the price action throughout this EURUSD rally was relatively controlled, that is until August. Beginning in August and particularly September, volatility picked up and the price action became choppy.
It isn’t always the case, but when an aggressive rally becomes volatile with a lot of back and forth movement, it usually means a reversal is just around the corner.
That’s especially true for markets that become overextended as was the case with the EURUSD.
2. Failed attempts to breach key resistance at 1.2040
There were two bearish pin bars from the 1.2040 resistance area. The first occurred on August 29th and the second developed on September 8th.
The pin bar that formed in late August was the product of the confluence of resistance at 1.2040. It was a retest of the horizontal level as well as ascending channel resistance.
These two candlestick formations were another sign that buyers were tiring. Yes, the September 8th session technically made a higher high, but it was the first time buyers repeatedly breached range resistance without securing a daily close above it.
3. Lack of higher highs and “heavy” price action
I’m grouping these together because one is a byproduct of the other.
We know that an uptrend is when a market is making higher highs and higher lows. With this in mind, we can say that a lower low would break the uptrend and signal that a move lower is likely.
However, there’s a way to see this coming. It’s something I refer to as “heavy” price action and looks just like the name implies.
Here it is in action on the EURUSD between the 14th and 21st of September:
Whenever a market begins to lean on support like this, it’s a sign that bids are drying up. It also suggests that a shift in momentum isn’t far away.
So what’s the state of the EURUSD and more importantly, where might it go from here?
As mentioned over the weekend, the pair is range-bound between 1.1670 support and 1.1840/75 resistance. The pair tested the range top on Friday but was confronted immediately by sellers.
It seems the best approach is to either wait for a sell signal from 1.1840/75 or a daily close (5 pm EST) below 1.1670 support. The distance between today’s price and the 10 and 20 EMAs suggests that we could see more consolidation before the next leg begins.
Keep in mind that ECB President Mario Draghi speaks on Wednesday at 1:15 pm EST followed by Fed Chair Yellen two hours later at 3:15 pm EST. We also have non-farm payroll this Friday at 8:30 am EST, so expect volatility to pick up later in the week.
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