Failed ECB-reaction: The EUR/GBP was at first weak after the ECB statement and press conference, but as the 8/7 session wound down and the 8/8 session began, traders started to bid up the euro. We saw the EUR/GBP flash a bearish engulfing candle in the 4H chart before the market decided to counter that ECB-reaction. The failure of the initial reaction is a strong indication that the EUR/GBP is ready for a significant consolidation or bullish correction.
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Consolidation, Kilroy: Since July, EUR/GBP has been consolidating. The 4H chart shows the 200-, 100-, and 50- period simple moving averages converging, which is a sign of non-direction. Today (8/8), price has used the SMAs as support and pushing above cluster, giving us a bullish clue. On a pullback, price should hold north of the 0.7940-50 area if it is indeed trying to complete this price bottom.
As the market establishes the support pivot around 0.7920, it is completing the right shoulder of a “kilroy” or inverted head and shoulders pattern. A break above 0.7985 should complete the price bottom.
This is a classic “reversal” pattern. Against a very persistent bearish trend, we can anticipate some bullish correction, but let’s not get ahead of ourselves by calling for a bullish reversal against a 1 1/2 year downtrend based on a bottoming attempt in the 4H chart.
Broken Trendline; 50-Day SMA: In the daily chart, you can see the bottom attempt already breaking a falling trendline that comes from the high of this year around 0.84, connected with May’s high around 0.8250. Notice that price is again testing the 50-day SMA, which held as resistance before.
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Next Resistance: A break above the kilroy’s neckline around 0.7985 should clear the trendline and moving average, exposing the next resistance pivot at 0.8033.
Breakout Projection: We might be able to expect a little stronger correction if we use a conventional pattern breakout projection – using the width of the pattern (head to neckline) and projecting it in the direction of the breakout. The width of the head and shoulders pattern is a little over 100-pips, so let’s just say 100-pips for now. This provides us a breakout target of around 0.8085.
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