The October Consolidation/Correction:
After rallying in October from the low on the year at 1.25 up to 1.2887, EUR/USD started to trade sideways last week. This week, we saw another failed attempt to push above 1.2850 followed by a dip. As we get into the 10/22 US session, the pair is falling below some key support factors, possibly reviving the prevailing downtrend.
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Bearish Continuation Signals: Here are a few bearish signals in the 4H chart:
1) Price has broken out below October’s rising trendline.
2) Price is below the 200-, 100-, and 50-period SMAs.
3) The 4H RSI has broken below 40 showing loss of October’s bullish momentum.
With the prevailing downtrend intact, these bearish signals puts pressure toward the 1.25 low on the month and year and maybe even lower.
If we get a pullback, a bearish market should hold price below 1.2750. A break above that might put EUR/USD back into October’s consolidation mode.
Now let’s say the bearish signals hold up. The strong prevailing trend suggests that there will be downside risk even beyond 1.25. But where should we expect support?
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Bearish Continuation Targets: When we look at the weekly chart, we can see that below 1.25, the next support levels are:
S1: 1.2405-1.2440 is a support/resistance pivot area.
S2: 1.2286 is a support pivot.
S3: 1.2042 is the 2012-low.
Bullish Correction Scenario: Now if price continues to consolidate above 1.25, the current high of 1.2887 is key resistance. A break above 1.2890 however opens up the 1.2995-1.30 area. This is a common support/resistance pivot area, and the falling trendline from 1.3993 will likely meet price and challenge the rally. At that point, the EUR/USD would still be bearish, but a break above 1.30 might suggest that the 1.25 low on the year is going to stick around as a key low and support for a while.
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