Forex Analysis: EUR/USD Head-and-Shoulders Reversal or Simple Correction?

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EUR/USD Daily Chart

EUR/USD (daily chart), as of February 14, 2013, has dropped further from its 14-month high two-weeks ago around 1.3700 resistance and its temporary recovery yesterday up to 1.3500 resistance. Today’s substantial fall in price has brought the pair close to key support around the 1.3300 price region.

While price is still comfortably within the bounds of a strong overall uptrend extending back to the July 2012 1.2040 low, today’s breakdown has also tentatively broken down below the neckline of a potential head-and-shoulders topping pattern. This pattern has its left shoulder around the 1.3400 area high in mid-January, its head around the 1.3700 area high in early February, and its right shoulder around yesterday’s 1.3500 area high. As head-and-shoulders patterns are considered potential reversal formations, this price action hints at further possible bearishness going forward.

A strong breakdown below 1.3300 support would confirm this bearishness, with a further breakdown below the 1.3200 area placing the current bullish trend in serious risk of reversal, with an initial objective around 1.3000 support. To the upside, only a breakout above 1.3500 would place renewed confidence in a bullish trend continuation, with further upside objectives once again around 1.3700 and then potentially towards the 1.4000 resistance area.

James Chen, CMT
Chief Technical Strategist
City Index Group

Forex trading involves a substantial risk of loss and is not suitable for all investors. This information is being provided only for general market commentary and does not constitute investment trading advice. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any financial instrument and should not be used as the basis for any investment decision.

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About Author

James Chen is Chief Technical Strategist for City Index Group. He is also a Chartered Market Technician. He is the author of the books: "Essentials of Foreign Exchange Trading" (John Wiley & Sons, 2009) and "Essentials of Technical Analysis for Financial Markets" (John Wiley & Sons, 2010). Mr. Chen writes currency analysis, leads forex trading seminars and has appeared in numerous major financial media outlets, including CNBC, Bloomberg TV, Forbes, Reuters, Dow Jones, and the Associated Press.

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