EUR/USD – Assessing Trades Against the Correction Rally

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EUR/USD - Assessing Trades Against the Correction Rally

EUR/USD has been bearish since May, and by all account, is still bearish. Last week, the pair fell to a fresh low on the year at 1.2357 before rebounding.

EUR/USD 4H Chart 11/10
eurusd 4h chart 11/10

(click to enlarge)

Consolidation Breakout :The 4H chart shows a market recently broke below a month-long consolidation. This was on the back of the FOMC ending QE, and giving the USD a boost across the board. Meanwhile, the ECB appears to be gearing up for QE, so we have a divergence in monetary policy expectations.

Still Bearish: Note in the 4H chart that despite the current rally, price is still held below the 200-, 100-, and 50-period simple moving averages (SMAs). These moving averages slope down, are in bearish alignment, and is spreading apart, which shows that the bearish bias is strong. The 4H RSI came off a bullish divergence and is no longer oversold. If it holds below 60, it will reflect maintenance of the bearish momentum.

Probably the most important factor at the moment is that price is still making lower highs and lows. The current rally has brought price near the previous high, but 1.25 appears to be offering some resistance. Here are a couple of trade ideas, and assessment of their reward to risk profiles:

Trade Idea 1: Sell at 1.25
Stop: 1.2540
Target: 1.2360

Rationale; Reward to Risk: Considering the market still being bearish, one trade idea is to sell with a stop just above the previous high, at 1.2533. Let’s say we have the stop at 1.2540, and an entry at 1.2490. That is a 50-pip risk at stop-loss. Now, while we can expect another lower low, let’s be conservative and consider the 1.2360 level a target, in case the market decides to turn flat. That still yields a potential gain of 130 pips (1.2490-1.2360). The reward to risk is 130:50, or 2.6:1.

Trade Idea 2: Sell at 1.26:
Stop: 1.2680
Target 1  1.2450.
Target 2: 1.2360

Rationale; Reward to Risk: Let’s say the market wants to consolidate, like it did in October, though the structure is likely going to be different. Now, for a medium-term consolidation, there is upside risk toward the 1.26-1.2650 area.The 1.26-1.2650 area is where 1) 200- and 100-period SMAs reside, 2) a falling trendline offers resistance, 3) a common support/resistance pivot area going back to October’s consolidation price action.

The conservative target, which considers the possibility of the market turning bullish, is 1.2450. The reward to risk for this target is around 150:80, just under 2:1. The second target is back to the low on the year around 1.2360. This R:R is 240:80, or 3:1.

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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.