EUR/AUD – Inverted H&S Pattern and a Trendline Breakout

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EUR/AUD - Inverted H&S Pattern and a Trendline Breakout

The EUR/AUD has been sliding since mid-October, from the high on the month near 1.47 down to 1.4209 to end the month. Since then, we are seeing a shift in the trend, but it is at the crossroad right now between signaling for further bullish correction/reversal and a bearish continuation. Let’s examine the 4H chart first to assess the technical set up.

EUR/AUD 4H Chart 11/5
euraud 4h chart 11/5
(click to enlarge)

The 4H EUR/AUD chart shows the pair rallying from the 1.4209 level to 1.4450 before stalling. This rally did 2 things:
1) It broke above the falling trendline from October’s high, which signals a shift in trend.
2) Additionally, we can see an inverted head and shoulders pattern, which also signals a shift away from the prevailing short-term bearish swing.

Not Bullish Yet: However, the fact that price is holding below 1.4450, where we have the 100- and 200-period SMAs, maintains a bearish bias. Also, we can see that price is essentially still below the neckline of the inverted H&S pattern, so there is no price bottom. Furthermore, the 4H RSI held below 60, which shows maintenance of the prevailing bearish momentum. This is why we would say that the EUR/AUD is at the crossroad.

Bullish/Bearish Outlooks: Given these technical conditions, we can say that a break above 1.4450 would be a strong bullish reversal signal, especially if the 4H RSI pushes above 60 to show loss of bearish momentum.

However, a break below 1.43 would maintain a bearish-neutral market, with pressure back to the 1.4209 low, and with risk of breaking lower because the prevailing trend would still be intact.

Now, when we look at the daily chart, we get a better perspective, but in terms of directional clarity, it is also “at the crossroad”

EUR/AUD Daily Chart 11/5
euraud daily chart 11/5

(click to enlarge)

Bearish in 2014: First of all, we should acknowledge that EUR/AUD has been bearish throughout 2014, falling from 1.5831 to 1.3788.

Trend Shifting: There was a strong rally in September, a v-shape reversal swing, that broke above the 2014 trendline. Price also climbed above the 100-, and 50-day SMAs, and the daily RSI broke above 60. These are signs that the prevailing downtrend may be in trouble. The market in the daily chart thus also is at the crossroad, looking to either confirm the bullish breakout for further bullish outlook, or invalidate it, which would lead to bearish continuation.

Outlooks: If price breaks below 1.42, it would be a bearish continuation signal first toward the 1.40 handle, then the 1.3788 low on the year.

If price pushes above 1.4450, it revives the 1.46 and 1.47 highs, with risk of even further correction. In this scenario, we should limit the bullish outlook to the 1.50 psychological level  and support/resistance pivot.

Fractal Technical Set Ups: One more note is that the 4H and daily charts look very similar. Consider the possibility that a directional signal in the 4H chart has the potential of signaling direction for the higher time-frame as well.

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.