A EUR/GBP Short That Requires Patience and Precision
- Pennant-Like Weekly Pattern in EUR/GBP
- Key "Decision Point" on Lower Time Frames
- 3 Technical Themes Unfolding at Once
The weekly chart of EURGBP now seems slightly confused. What was originally a bullish formation—a pennant after a move up—is now looking somewhat suspicious. This pennant-type pattern should have broken upwards to continue the move, but it has been edging ever lower in recent weeks instead.
Although the overall pattern is still admittedly bullish, there’s reason to view this with caution. For the moment, the best move would be trade EURGBP as if it is in consolidation, or in conjunction with the lower-time-frame trend, which is down.
The daily chart below shows price having risen to the first decision point, i.e. the test of the declining line of resistance. Regardless of whether price breaks down or moves up from this level, there are about 80 pips of potential movement. However, given the clear downward trend in this pair, the short would be most preferable.
Guest Commentary: “Decision Point” on EUR/GBP Daily Chart
Given how limited the first targets are, a lower-time-frame entry is preferred in order to offset the relatively smaller potential with greater precision.
The four-hour chart below is interesting because of a number of coinciding levels:
- A previous horizontal resistance and support-turned-resistance immediately above;
- A declining line of resistance;
- An inverse head-and-shoulders breakout, the standard target for which has been illustrated on the chart, and also falls within the key zone of resistance.
Guest Commentary: 3 Technical Factors Impacting EUR/GBP
Thus, the resistance area shown in blue is a logical place to engage with a potential downward move in price. The zone indicated is 0.8296-0.8331, or 35 pips deep. Compared to the potential 80 pips between here and the first level of major support, this is reasonable risk. However, the hourly chart may provide a more suitable trade trigger.
Guest Commentary: The Ideal Time Frame for Trading EUR/GBP
Readers used to the typical entry triggers will wonder if now is the time to short EURGBP, as there is already a bearish reversal divergence in price with the (8,3,3) stochastic (not shown). Normally, that would be so, but the momentum move up makes this a more dangerous proposition, and thus, it would be better to wait for the next divergence before taking this trade.
Other common entry triggers like pin bars and/or bearish engulfing patterns would still be valid, and it would not be unreasonable to take two or three tries to get in on this trade. At the time of writing, a proper trigger had not yet developed, but this remains a distinct possibility.
By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.