Analysis

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EURUSD
Jun 24, 2021, 10:42 AM GMT
#Forex

Waiting for the End of the Pullback on the EURUSD

The price of the EURUSD looks ready to continue plunging once the temporary bullish pullback is completed. A new downtrend started emerging recently, following the highly pivotal FED meeting for June. The Federal Reserve adopted a distinctly more hawkish policy stance, which reinvigorated the struggling dollar.

With the possibility of a rate hike as early as 2023, the greenback is set to continue recuperating in the longer term. In the shorter term, however, the euro was able to make up for some of last week's losses on the better-than-expected industry numbers in Germany.

This temporary hawkishness of the single currency is waning, which means that EURUSD's bullish momentum is about to be exhausted soon. Consequently, bears can take advantage of this by utilising trend-continuation trading strategies. In particular, they can look for a chance to sell the EURUSD at the top of the pullback before the price action gets ready to resume falling.

The Temporary Break in the Markdown

The price action has been behaving precisely as per the projections of the Wyckoff Method over the past several weeks, in that it has been establishing clearly discernible upswings and downswings. As can be seen on the daily chart below, it is currently developing a new Markdown, headed towards the lower boundary of the previous Re-Accumulation range.

In other words, the longer-term target for the bearish downtrend is the 38.2 per cent Fibonacci retracement level at 1.16940. In addition to being a Fibonacci threshold, this support level also marked the lowest point of the last 1-5 impulse wave pattern, as postulated by the Elliott Wave Theory.

This is why it bears such psychological importance. However, before the EURUSD could sink so low, the price action would have to break several other supports.

Notice that the Markdown was initiated after the price managed to break down below the lower boundary of the Wedge. This signifies the magnitude of the new downtrend. Subsequently, the price action was also able to penetrate below the 23.6 per cent Fibonacci retracement level at 1.19437.

Then, the aforementioned pullback began developing. It reached the 23.6 per cent Fibonacci from below, which is now most likely to serve as a turning point for the direction of the price action. The price has been unable to close above it for three days in a role, as indicated by the candles' upper shadows, which means that the pullback may have already peaked.

The price of the EURUSD is consolidating below the 23.6% Fibonacci retracement before the downtrend is resumed

On the one hand, it seems highly probable that the price action would reverse from 1.19437 and resume falling. Before it can sink to the 38.2 per cent Fibonacci retracement level, however, the price would have to break down below the 300-day MA (in purple). Hence, bears should be looking for signs of a potential rebound at 1.18000. This is the first major target for the renewed downtrend.

On the other hand, the pullback could be extended a little bit higher before the price can reverse. The price action could establish a fakeout above the 23.6 per cent Fibonacci, reaching the 200-day MA (in orange). The latter is currently converging with the psychologically significant resistance at 1.20000, which is yet another major turning point. Therefore, depending on their level of risk-aversion, bears can either look for an opportunity to sell at the current spot price or wait and do so around 1.20000.

Catching the Reversal at the Exact Moment

Notice that though waning, the bullish momentum in the short term remains prevailing. This can be inferred by the MACD indicator, meaning that the price could indeed probe above the 23.6 per cent Fibonacci before a more decisive reversal takes place.

This is substantiated by the fact that the price is currently consolidating just below 1.19437 but above the 20-day MA (in red). Yet, the 50-day MA (in green) is nearing the Fibonacci threshold from above. All of this increases the likelihood of adverse fluctuations around 1.19437.

The EURUSD is ready to reverse from the descending channel as bearish sentiment increases

It is also interesting to point out that the descending channel, which was especially important before the beginning of the Markdown, could still be useful. In particular, traders can observe how the price behaves around its lower boundary if a fakeout does occur above the 23.6 per cent Fibonacci. The channel's lower boundary appears to be crossing the psychological resistance at 1.20000, which increases the chances for a reversal there.

Finally, the hourly chart below underscores the temporary consolidation of the price action within a bottleneck. In addition to the fact that the price is concentrated very close to the 23.6 per cent Fibonacci, it is also being concentrated above the 100-day MA (in blue) and below the 150-day MA (in orange).

That is why a decisive breakout/breakdown away from these two extremes would demonstrate whether the pullback would be extended a little bit higher or the reversal would happen right away.

EURUSD 1H Price Chart

Concluding Remarks:

Less risk-averse bears could look for an opportunity to enter short around the current market price, as stated earlier. This means the range between 1.19437 and the minor support at 1.19100 (underpinned by the 100-day MA).

They should place their stop-losses above the 23.6 per cent Fibonacci. Once the price breaks down below the 100-day MA, the SLs could be moved to the 100-day MA.

More risk-averse traders, in contrast, could wait and see whether the price goes to 1.20000 before they join the market there.

Follow-up 1
/ Jun 30

EURUSD Ready to Continue Diving Following the Pullback

The bullish pullback that was alluded to in the initial analysis looks completed. This means that the price of the EURUSD is now ready to continue establishing the broader downtrend.

The dollar is recuperating under the currently subdued conditions on the market, as headline liquidity diminishes. Part of the reason for this is the renewed interest in lower-risk securities that is taking place as pressure keeps mounting on higher-risk assets.

While there are no major economic events in the calendar that could boost the euro this week, the non-farm payrolls in the U.S. are likely to strengthen the greenback on Friday. Hence, the underlying indicators all seem to be pointing towards a probable continuation of EURUSD's downtrend.

The EURUSD was dennied at the 23.6% Fibonacci  retracement level and the broader downtrend is now ready to continue heading lower

As shown on the 4H chart above, the temporary bullish pullback climaxed just below the 50-day MA (in green), which serves the role of a floating resistance. Subsequently, the price action went on to penetrate below the 23.6 per cent Fibonacci retracement level at 1.19437 yet again.

This reinstated selling bias is also confirmed by the MACD indicator, which is signalling mounting bearish momentum. All of this confirms the expectations for further dropdowns in the near future.

If the price action manages to penetrate below the Support Area (in green), it is then likely to head towards the next psychologically significant target level. This is the 38.2 per cent Fibonacci retracement at 1.16940.

In case that the price action does not manage to penetrate below this area from the second attempt, another minor throwback to the 23.6 per cent Fibonacci retracement from below could follow afterwards. This would provide bears with yet another opportunity to sell just below this major support-turned-resistance level, in anticipation of further dropdowns.

Follow-up 2
/ Jul 7

EURUSD's Temporary Consolidation Now Over

The short term sentiment on the EURUSD looks poised to change yet again. The price action looks ready to transition from a minor consolidation range, and resume falling as per the established downtrend. The latter was examined in greater detail in the initial analysis of the pair.

The temporary range emerged as a consequence of the low market liquidity that is currently being observed. Trading activity remains quite subdued because most market participants are on their summer holidays (effect of market seasonality), and also because the current week is relatively uneventful.

But now, EURUSD's price action is demonstrating definite signs that it is ready to resume falling, which entails bears with an opportunity to utilise trend continuation trading strategies.

The price of the EURUSD isprobing below the lower boundary of a Descending Wedge pattern, as the broader downtrend looks poised to continue developing

As can be seen on the 4H chart above, the aforementioned range actually takes the form of a Descending Wedge pattern. When found at the bottom of a preceding downtrend, such patterns are typically taken to entail potential bullish reversals.

However, given the fact that the price action appears to be probing the lower boundary of the Wedge, this can be perceived as a trend continuation indication. In order for this to be confirmed, the price would have to break down below the lower boundary of the Wedge decisively. It is the current 4H candle that has to do so.

Notice that the price action remains concentrated below the three moving averages, as all four maintain a perfect descending order. The 20-day MA (in red) is positioned below the 50-day MA (in green), which, in turn, threads below the 100-day MA (in blue). All of this underpins the persisting bearish bias in the market.

The MACD indicator, also, registered a bearish crossover recently. This means that bearish pressure is once again mounting in the short term. This is also confirmed by the fact that the price action reversed from the 50-day MA on the two occasions it probed it. These tests also represented reversals from the 38.2 and the 23.6 per cent Fibonacci retracement levels.

Bears can look for an opportunity to place more selling orders at the close of the current candle (if it closes below the Wedge). They would also have to place tight stop losses in order to protect themselves in case that the breakdown turns out to be a false movement. SLs can be placed just above the peak of the current 4H candle.

Profit & Loss
Short Term Long Term Net % Gains
+ - + -
61 PIPS 0 0 65 PIPS
-0.04%
Short Term
+ -
61 PIPS 0
Long Term
+ -
0 65 PIPS
Net % Gains
-0.04%
Journal Entries
Jun 30 - Entry 1
The EURUSD established a minor bearish reversal after the price managed to break down below the 23.6% Fibonacci retracement level
  • As forecasted, the price of the EURUSD did reverse shortly after the publication of our last analysis of the pair. The second entry signal was triggered after the price broke down below the 23.6% Fibonacci; however, the first entry signal was not realised.
  • This is a good example of why traders need to be patient and remember that they will not always gain the perfect entry from the first try. Sometimes they'd have to execute several orders before they catch the anticipated reversal/rebound.
Jul 4 - Entry 2
The price of the EURUSD tested but failed to break down below the lower boundary of a major consolidation range
  • Shortly after the publication of our last EURUSD follow-up analysis, the price started going down, as expected. However, it was unable to break down below the lower boundary of the Support Area at 1.18220. This invalidated the short trade.
  • The catalyst for the snap rebound from said support level was the June payrolls data in the U.S. Traders should keep an eye for such massive shadows/tails of candles around major levels of support and resistance, particularly when there are important economic releases. The development of such tails/shadows is demonstrative of whether these levels would be broken or not.
Jul 9 - Entry 3
The price of the EURUSD rebounded surprisingly on a Black Swan event -an unexpected market development
  • The price of the EURUSD started going up shortly after the release of our last follow-up analysis of the pair. This was unexpected because, at the time of writing, the underlying market sentiment was ostensibly bearish.
  • The snap rebound was owing to the new monetary policy strategy of the ECB.
  • This is a good example of a so-called "Black Swan" effect - something unexpected happening that affects the market in a way that couldn't have been anticipated.
  • Sooner or later, all traders would have to deal with such surprising developments, which is why consistency of actions is so crucially important in trading.

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