EUR/GBP – The Engulfing Candles are Pretty Convincing

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EUR/GBP - The Engulfing Candles are Pretty Convincing

Backdrop: The EUR/GBP continued its downtrend early in January after breaking below a multi-month consolidation that started in September. As we can see in the daily chart, price has slid from above 0.80 to about 0.74, where it is trading now.

EUR/GBP Daily Chart 2/13
eurgbp daily chart 2/13
(click to enlarge)

Strong Bearish Trend after Breakout: The downtrend is very apparent with very strong bearish candles relative to the bullish attempts. The pattern of lower highs and lower lows have been persistent. After a short-term consolidation at the end of January, we saw a bearish continuation attempt in early February. Notice the strong engulfing like bearish candles. These are pretty convincing of further downside.

Negative Reversal: Furthermore, the RSI shows a “negative reversal” signal, one coined by RSI guru Andrew Cardwell. This is when after pushing below 30, the RSI makes a higher high with a corresponding lower high. Now, price has indeed pushed into a new low, but will it continue lower?

EUR/GBP Weekly Chart 2/13
eurgbp weekly chart 2/13
(click to enlarge)

Bearish Continuation Despite Oversold Reading:
The weekly chart looks very bearish. especially after the break below 0.78. now, after a week of stalling and a rebound to 0.76, last week, price came down sharply again. Here, you also see a bearish engulfing candle. It is also what’s called an outside bar.

Even though the RSI is in very oversold territory, the candlestick action suggests there could be further downside before the market is overstretched to the downside. (Imagine the market oscillating above and below “fair” value as momentum overshoots them in one direction or the other. Here, the “fair” value is obviously also falling, so it might take longer before price is far oversold.

Short-term Bearish Candles:

EUR/GBP 4H Chart 2/13
eurgbp 4h chart 2/13
(click to enlarge)

Even the 4H Chart shows bearish engulfing candles, the latest one during the 2/12 session. As that session closed and we enter the 2/13 session, price is tentatively trading within that bearish candle. This chart suggests bearish continuation, and we have these strong bearish continuation type candles in short, medium, and long-term charts.

I am not sure where it will extend to, but EUR/GBP surely looks like it wants to push its downtrend further. At this point, only a clear break back above this week’s high around 0.7450 would cast doubt about the bearish outlook.

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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.