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Head and Shoulders: Will EURUSD drop to it’s knees and toes?

by on May 21, 2013 1:29 pm BST
 

In today’s currency report, the downside, intraday target on EURUSD accurate hit 1.284 and bounced off to an intraday high of 1.2875. Nevertheless, the infamous head and shoulders pattern (asymmetrical) is clearly visible on the daily and weekly charts with the price action teetering on the neckline to complete the second “shoulder.” It is important to note that this pattern should only be traded upon a break and close below the neckline, but noticing the pattern can give clues to potential future price action. The question is will the head and shoulder break and cause the EURUSD to fall to it’s knees and toes? Here are a few indications:

The price action of the Fibonacci retracement to the all-time high of 1.6037 currently sits on the 23.6 percent line, which, interestingly enough, is the right shoulder. With three candles failing to break and close below this line, the 23.6 percent line is currently holding as support. Additional, the Fisher transform indicator is a great technical indicator for picking out price reversals; and currently, the Fisher indicator is ticking up indicating potential upward reversal.

Conversely, the 50 EMA has crossed and ticked below the 200 EMA – commonly know as the “death cross.” This cross can allow the bearishness to continue. If not and there is a price reversal, the price action could very well bounce to the 50 EMA at 1.30189.

The dollar may be sputtering out, and this could aid in the recovery of EURUSD. After bouncing off the high of 84.24, the dollar visited support at 83.65 to continue on to set new highs intraday at 84.51. However, it has retraced to close below the new high two consecutive trading sessions.

Daily chart of the Dollar Index

Daily chart of the Dollar Index

Game breaker: political economics. The end of the week hosts numerous important economic reports (https://www.investing.com/economic-calendar/) but are headlined with the FOMC minutes and ECB chief Mario Draghi. Economically, the U.S. has new home sales and initial jobless claims while Germany reports their GDP and IFO business climate.

The head and shoulders pattern is inciting and would bring an ultimate target of 1.25, but the overall picture is less clear. Fundamentally, the euro is broken and is why I have yearly targets of 1.275 and 1.265, but I do respect the euro’s ability to  retrace upwards before it comes down. Either way, it is hard not to be bearish of the Eurozone’s fundamentals and the politics that surround it.