EUR/GBP Setting Up for Bearish Continuation

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EUR/GBP Setting Up for Bearish Continuation

Bearish Trend, RSI at 60: EUR/GBP has been bearish since August 2013, from a high of 0.8769. After a year later, we are seeing the EUR/GBP consolidate. after a low of about 0.7875. Traders ended last week holding the pair below a previous resistance pivot at 0.8033. The RSI was also held up at 60. This is a point where sellers might come in an revive the bearish outlook. After all, the bearish outlook is intact, and the daily RSI should hold below 60 if the market is to maintain the bearish momentum.

EUR/GBP Daily Chart 8/18
eurgbp daily chart 8/18

(click to enlarge)

A Bearish Signal is Needed: It is still a bit premature to call a bearish continuation. We might want to see some bearish momentum in the short-term before letting go of the bullish correction scenario, which could still be in development. Let’s take a look at the 4H chart.

EUR/GBP 4H Chart
eurgbp 4h chart 8/18

(click to enlarge)

1-Month Correction vs. 11-Month Bearish Trend: In the 4H chart you can see a bullish development. Price has pushed above the moving averages which are in bullish alignment, sloping up , and just starting to spread apart. The RSI has tagged 70 and held mostly above 40. If not for the prevailing bearish trend, I would prefer a bullish outlook on EUR/GBP. Instead, I am looking for the prevailing trend in the medium and long-term that lasted about 11 months to take over the month long consolidation/bullish correction.

Bearish Signs Required: I would like to see at least a break below 0.7970, which clears some local support pivots, and below the 50-period SMA in the 4H chart. The RSI needs to clear below 40, and preferably tag 30 to show me there is bearish momentum. Then on a pullback, I would look to short around 0.80, if the RSI has tagged 30 and is coming back near 60.

The initial bearish outlook will be toward the 0.7930-40 area, which contains a support/resistance pivot area ,a rising trendline from July, and the 200-period SMA in the 4H chart. A break below 0.7930 would probably open up further bearish outlook first toward the 0.7875 low on the year, but also with further downside risk.

Failure; More Bullish Correction: Now failure to turn momentum bearish (RSI holds above 30, maybe even 40), and failure of price to even break below 0.7980 and thus hold above the 50-period SMA, would be signs that there is still further upside risk in the short-term not only back to the 0.8033 high, but toward the 100-day SMA around 0.8075.

To contact the reporter of this story, email Fan Yang at fan@forexminute.com
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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.