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Weak Volume Puts Long-Term EUR/USD Move Higher in Doubt

Weak Volume Puts Long-Term EUR/USD Move Higher in Doubt

Mark Meadows, TopstepFX,

Talking Points:

  • EUR/USD moved 3.4% higher over the past nine trading sessions. The next point of resistance comes at 1.1750
  • Despite the strong price reversal, volume in the EUR futures contract remained average. Typically, large reversals are made on strong volume
  • The market is moving back into an area of balance, potentially to continue formation of a large head-and-shoulders pattern

Over the past two weeks, EUR/USD bounced significantly off of one-year lows. On the chart, this is an impressive reversal of a decline that started in April. However, looking at the EUR futures contract, we see that the move higher was not accompanied by strong volume. Typically, volume confirms reversals – showing that more traders are initiating positions and accepting the higher price.

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EUR/USD Advances 3.4% over Nine Trading Sessions

EUR/USD’s two-week rally follows a break below 1.15 to new, one-year lows. The recent rally equates to a 3.4% move higher (from the 1.13 lows to 1.1680 at present) and is one of the larger multi-day moves in the currency pair since late May.

Weak Volume Puts Long-Term EUR/USD Move Higher in Doubt

Zooming out on the chart, the next point of resistance is the July 31 highs of 1.1750 (black line) in the near term. Additionally, significant resistance may form between there and the June 14 highs at 1.1850 (red line). With these levels overhead, there appears to be mounting pressure for EUR bulls.

Despite EURUSD Reversal, EUR Contract Volume Lags Dampening Conviction

Traders look for high volume to confirm the validity of market moves, particularly as trends reverse. That’s because with high volume comes broader participation. If you think of the market as a discounting mechanism, higher volume means that more participants are involved in setting the price. In turn, that means that the price they agree on is more broadly viewed as the equilibrium price.

Since forex is decentralized, volume is difficult to gauge. However, futures markets can add this missing piece. In the CME’s September Euro future, volume remained below 250,000 contracts a day during most of this rally. This compares to volume on the August 10th decline of 453,203 contracts.

Now that we are in the last week of summer, it’s unlikely volume will kick in this week. That could be setting us up for a very interesting start to September.

Back to an Area of Balance and Firming of a Head-and-Shoulders Pattern

Weak Volume Puts Long-Term EUR/USD Move Higher in Doubt

Technical patterns are rarely this obvious. In fact, it’s hard to look at a daily chart of EUR/USD and not see a clear head and shoulders pattern forming. The recent rally does not discount that pattern, but instead suggests that it may need more time to play out.

In fact, the left shoulder and head took around five months to form and play out. The left shoulder first made a low in July 2017 before breaking out in January 2018. The head formed from January through May/June, when prices broke down. And the right shoulder has been forming since then. Similar timing would suggest that this formation could take until October to finalize the pattern.

As long as prices stay below May’s high at 1.20, this formation is valid. If prices break down below support at the 1.13 double bottom from July 2017 and August 2018, then there may be more downside to come. A rally above 1.20 would suggest that prices could move towards the February highs.

Mark Meadows is an analyst at TopstepFX, a proprietary trading firm that funds retail forex traders with live capital. Learn more how you can earn TopstepFX’s capital at www.topstepfx.com/.

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