EUR/USD is in a mini range consolidation so far this week. As we get into the 8/26 US session, the pair has been trading roughly between 1.3210 and 1.3185. We saw some expansion in the Asian session, entering the European session, but EUR/USD is still within this very short-term consolidation.
Let’s examine a couple of scenarios and suitable trading plans for them. First, we should establish the overall mode, which we know is bearish in the daily, 4H, down to the 1H chart. The fundamentals also point south as the Eurozone has been sliding into a deflationary, almost stagnation-type environment, and the US continue to see strong data. So, both our trading plans for the short to medium term should be bearish for now.
(click to enlarge)
Scenario 1 – bullish breakout from consolidation:
Let’s say there is a break above 1.3210 and we see a rally. We should probably get ready to see if price approaches the 1.3230-40 area, and the 1H RSI around 60. Then as soon as we see evidence of resistance, we should anticipate a bearish attempt. The 1.3180 level would be the first target, but if the prevailing bearish trend continues, we have the 1.3105 low from Sept. 2013 in sight.
If price rises above 1.3260 and the 1H RSI tags 70, we are likely in a consolidation/bullish correction. There could still be bearish attempts, but our bearish continuation scenario will have to be shelved, and the potential downside target will have to be limited in the short-term until the consolidation/correction is over. So, a stop loss can be placed at 1.3270.
Therefore, we may have a trade plan like this: Entry: 1.3230, Stop-loss 1.3270, Target 1: 1.3180, Target 2: 1.3110.
Stop-loss Risk: 40 pips
Target 1: 50 pips
Target 2: 120 pips.
The average of the targets is 85 pips and that makes the reward to risk slightly better than 2:1.
Scenario 2 – Bearish breakout from consolidation:
Let’s say price falls below 1.3180 without much of a bullish correction, we can look for a bearish outlook toward 1.3105/10. We might want to wait for a pullback after the breakout, so that price can be back in the 1.3180-1.3190 area. Then, we are looking for price to hold below the 1.32 handle. A break above it might suggest consolidation is not over, especially if the RSI is pulled back above 70. A stop loss can be put in at 1.3225. This gives us a trade plan like this:
Entry: 1.3180, Stop-Loss: 1.3225: Target 1: 1.3110, Target 2: 1.31. For now, we will limit our downside risk to 1.31.
Stop-loss Risk: 45 pips
Target 1: 70 pips
Target 2: 80 pips
With price getting closer to the 1.31 handle, the reward to risk of a breakout trade is not as attractive, but the breakout does give the bearish outlook a stronger case.
Trade well, trade safe!
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