Friday, July 16, 2010
Wednesday, July 14, 2010
EURUSD Possible Head and Shoulders Pattern
Ok, this is the current EURUSD Daily chart. You can see how price action went down to the 4 year low, represented by the bottom aqua hashed line, then bounced back up to the previous low from this year, kind of went a little down again and now it is back up above that.
Well, this is half of a chart pattern called the "Head and Shoulders" pattern. The movement from the low to the lower high is the first "shoulder." The movement back down is the potential neckline. Then the movement back up is potentially the head. Head and Shoulder patterns indicate that price is going to DROP precipitously. Which in this case means that the trend will continue, so we already know that momentum is pushing it that way. The ECB has been trying to maintain the EURUSD above these levels of support (hashed aqua lines.) However, the momentum of the overall trend is DOWN, DOWN, DOWN.
Here we see a diagram of a typical Head and Shoulders pattern. After the formation of the second shoulder, expect price to fall. The target will be the distance from the top of the head to the neckline. Of course, not all Head and Shoulders patterns are this elegant or symmetrical.
Below, we see an example from Informedtrades. You can see the neckline isn't necessarily straight horizontally, but tilted slightly downwards, and the two shoulders are not identical. That's ok. We also see that price did in fact fall, very similar to the distance from the head to the neckline.
Anyway, I just wanted to post that EURUSD daily chart. It has yet to complete the Head and Shoulders pattern, but given that momentum is downward, I believe it could do so.
Another thing that is interesting is that price came way back up above the previous lows due to Non Farm Payrolls. That's the reason it went low enough to touch the four year low to begin with. So there are significant fundamentals in play too.
Note also that the distance from the head to the possible neckline (top chart, above) is very similar to the distance from the neckline to the four year low! ECB could try to hold it there. Hard to say at this point.
As always, click on the charts a time or two to see them enlarged.
Don't bet your rent money!