EUR/GBP – Trading the Corrective Flag Pattern

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EUR/GBP - Trading the Corrective Flag Pattern

2-Year Down Trend: Let’s start with the weekly chart. EUR/GBP has been bearish since hitting a high near 0.88 early in 2013. We have seen a drift lower in 2013, then more of a decline in 2014. In 2015, the decline has accelerated, and the medium to long-term trend remains intact despite the fact that the weekly RSI is oversold below 30. There is some bullish correction developing this week, but this could set up for another fade-the-rally scenario.

EUR/GBP Weekly Chart 3/20
eurgbp weekly chart 3/20
(click to enlarge)

Moving to the daily chart now:

EUR/GBP Daily Chart 3/20
eurgbp daily chart 3/20
(click to enlarge)

The daily chart shows that after almost reaching the 0.70 psychological level last week, price has been in a bullish correction. Based just on the daily chart, we can see a key resistance around around 0.74, which is where the 50-day SMA resides. It would also be reinforced by a falling trendline from Dec. 2014. Finally, if price does approach 0.74 and stalls while the daily RSI also stalls around 60, we should be prepared for a bearish continuation attempt at least back to the 0.71 support/resistance pivot, which we can see more clearly in the 4H chart.

EUR/GBP 4H Chart 3/20
eurgbp 4h chart 3/20
(click to enlarge)

Flag Pattern and the Breakout Scenario: In the 4H chart, we can see a rising flag pattern developing since last week. Now, we can see a key support/resistance area around 0.7150. This is also where the 50-period SMA resides. A break below 0.7150 would clear the flag pattern and put price clearly under the 200-, 100-, and 50-period SMAs, which would signal the revival of the bearish outlook.

So, just to recap: 

1) Sellers might be around 0.74, especially if the daily RSI is near 60.

2) If price does not get to 0.74 and falls below 0.7150, it would be a bearish breakout that can lead to another swing at least back towards a support resistance pivot just under 0.71, with the 0.7014 low on the year in sight.

3) A break above 0.74 was not discussed, but it would signal that a significant consolidation is developing. At that point, I would still favor the bearish outlook, but we will have to reassess what kind of consolidation pattern we will be dealing with.

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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.