Bullish Correction:
EUR/USD has been able to rally from a new low on the year at 1.25 to about 1.2790. It should be noted that price broke above the 100-, and 50-period simple moving averages (SMAs) in the 4H chart, which shows some loss of bearish momentum. Price also made a new high on the month at 1.2791, breaking the lower highs and lower lows pattern. Furthermore the 4H RSI has tagged 70, showing bullish momentum.
EUR/USD 4H Chart 10/10
(click to enlarge)
The Bearish Scenario:
All these bullish signs are still young, but we shouldn’t ignore them. With that in mind, let’s examine the bearish scenario. We know there is a prevailing trend since the 1.3993 high on the year established in May. Secondly, after this week’s rally to 1.2791, EUR/USD has fallen back below 1.27, and below this week’s rising trendline. It has crossed under the 100-period SMA and about be below the 50-period SMA. If the 4H RSI also drops below 40, we have most of those aforementioned bullish signs reversed. This is the bearish scenario. If price comes back to test 1.27 and stays below, there would be even more reason to believe that price is going to be pressured back toward the 1.25 low.
The daily chart gives us more confidence for the bearish outlook. The main highs and lowers are still getting lower and lower, and this pattern is still intact. The moving averages are in bearish mode and price is below all of them. Finally the RSI has come back up above oversold conditions and resolved a bullish divergence with price, so EUR/USD is ready for further bearish continuation without the oversold label.
EUR/USD Daily Chart 10/10
(click to enlarge)
If price can start to hold below 1.27, the market has the 1.25 in sight, as well as the 1.2460 as the next support in the short-term. 1.2460 is the 78.6% retracement of the 2012-2014 rally from 1.2042 to 1.3993.
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