EUR/USD: Inverted Head & Shoulders In The Works?
Munther Marji | Sep 11, 2014 05:46AM ET
The euro’s dive found a bottom at 1.2858 on Tuesday, from which the price bounced back above 1.29, reaching as high as 1.2961. This price behavior, when looked at on the hourly charts, is consistent with all the needed requirements for an (Inverted Head & Shoulders) pattern. In this potential pattern, the left shoulder is September 4th low 1.2919, the head is Tuesday’s low 1.2858, and the right shoulder is Wednesday's low 1.2882. Now after reaching yesterday’s low, it does not look like a very symmetrical pattern, which out of my own experience does weaken the potential that we are in fact before an inverted head & shoulder pattern, and therefore we should not very excited about it, unless we clearly break above the potential neckline. In fact, the indicators on the intraday charts are close to reaching the overbought area, which is also not very encouraging. Attached chart #2, illustrates this potential formation.
Nevertheless, for this theory to continue to hold, we need yesterday daily low to hold, or in case there is a new one, to be reasonably close to it. A break below 1.2882 would be a sign that this is not a reversal pattern, and that the price will continue to move lower. On the other hand, the neckline is very close to the "extremely micro term" Marji 71.4% retracement at 1.2941.
As for the big picture, in spite of such a potential reversal pattern, it is still the same. Breaking 1.3101 was the big technical event seen last week, and it was no surprise to see this break resulting in a drop to a 14-month low at 1.2858 on Tuesday. As said in previous reports, breaking below the key level at 1.3101 would deteriorate the medium term outlook, and it certainly did!
Breaking such a key level meant that the falling move from July’s top 1.3991 is most probably not a correction for the rising move from the 2013 yearly low 1.2753. This means that it is either a correction for the whole move from 2012 yearly low 1.2041, or that it is not a correction to begin with, but a trending impulse move! Both of these possibilities mean that the Euro is going to suffer for weeks, may be months to come!
This break has led to a check of the long term charts, and as can be seen on attached chart #1, the Euro was in an obvious uptrend from 2000 to 2008, when it started losing value from its historical high 1.6037. After that, we have been swinging up & down in what is hard to consider anything but a “double zigzag” type of correction. If the wave count on the chart is correct, then wave (c) will be expected to target levels below the bottom of wave (a), which was 1.2041.
What can also be seen on the first attached chart is that the falling moves from 2008 historical high has reached the Fibonacci 38.2% & the Fibonacci 50% retracement levels. The 3 key retracements which come next are the Marji 57.1% retracement at 1.1570, the Fibonacci 61.8% at 1.1206 & the Marji 71.4% at 1.0456. It is seriously hard to imagine the Euro trading at these levels at the moment, but if we are actually in wave (c), which is notorious for being vicious & brutal, we could see at least one of those levels, may be by the beginning of 2015.
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However, on the long term, things look so bright, because after a double zigzag, the price will be expected to surpass the top from which this double zigzag started from, which was 1.6037! That would be very interesting to witness. The second lowest RSI on the chart seems to support this idea. The last time the weekly RSI reached these low levels, the price bounced up more than 3000 pips!
On the shorter term, there are no key resistance levels ahead of 1.3043. Nevertheless, the neckline of the potential hourly head & shoulders pattern is at 1.2941. A break above this level will be a first sign of short term strength, which would give the bulls a chance to test 1.2973 or 1.3008 ahead of the important 1.3043. A break above this level would most probably mean that we have seen an important short term bottom at 1.2858, and that the price will continue moving higher. In this case 1.3134 makes an attractive target, ahead of 1.3199.
As for the support level, they start at Wednesday’s low 1.2882, followed by a more important level at Tuesday’s 14-month low 1.2858, ahead of what looks to be an important level at 1.2804, without neglecting 1.2753. We also should pay attention to the long term Fibonacci 61.8% retracement at 1.2786. An accurate stop at this level would mean a lot.
Attached Chart(s):
Support:
• 1.2882: yesterday's low, a minor level.
• 1.2858: Tuesday's 14-month low, a more important one.
• 1.2804/10: a small support area combined of the daily lows for July 4th & 7th 2013.
• 1.2786: the long term Fibonacci 61.8% calculated for the whole gigantic move from 2012 yearly low 1.2041 to 2014 yearly high 1.3991.
• 1.2753: July 8h 2013 daily low, and major bottom.
• 1.2716: Nov 7th daily low.
• 1.2689: Nov 8th daily low.
Resistance:
• 1.2941: the adjusted neckline in the potential inverted head & shoulders pattern.
• 1.2973: micro term Fibonacci 38.2% calculated for the drop from September 3rd high 1.3158 to Tuesday’s 14-month low 1.2858
• 1.3008: micro term Fibonacci 50% calculated for the drop from September 3rd high 1.3158 to Tuesday’s 14-month low 1.2858.
• 1.3043: micro term Fibonacci 61.8% calculated for the drop from September 3rd high 1.3158 to Tuesday’s 14-month low 1.2858. This is probably the most important resistance for now.
• 1.3069: short term Fibonacci 38.2% calculated for the drop from August 15th high 1.3410 to Tuesday’s 14-month low 1.2858.
• 1.3134: short term Fibonacci 50% calculated for the drop from August 15th high 1.3410 to Tuesday’s 14-month low 1.2858.
• 1.3173: short term Marji 57.1% calculated for the drop from August 15th high 1.3410 to Tuesday’s 14-month low 1.2858.
• 1.3199: short term Fibonacci 61.8% calculated for the drop from August 15th high 1.3410 to Tuesday’s 14-month low 1.2858.
Trend:
• Short term: Down, as long as the price is below 1.2941.
• Medium term: Down, as long as the price is below 1.3458.
• Long term: Down, as long as the price is below 1.4109.
Article originally appeared on MarjiFX.com
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