Written by Theunis Kruger, FX Trainer at FXTM
The EURUSD currency pair, on the D1 time-frame, was in an uptrend until the December 31 when a higher top was recorded at 1.12391. Traders found the price attractive and supply overcame demand.
A closer look revealed that the Momentum Oscillator displayed negative divergence between point A and B, compared to the price at 1.11745 and 1.12391. This could have alerted technical traders to a potential technical reversal in the making.
After the top at 1.12391, the market broke through the 15 and 34 Simple Moving Average and the Momentum Oscillator broke through the zero baseline into bearish terrain. This further confirmed the possible price reversal or initial stages of a new trend.
A likely critical support level formed when a bottom was recorded on January 10 at 1.10851. Buyers tried to drive the market higher but the price found resistance on the January 16 near 1.11718 and sellers pushed the price lower again. The bearish pressure was confirmed with a Shooting Star Japanese Candlestick that was formed on the same day.
On the January 20 the EURUSD broke through the critical support level at 1.10851 with a short position ensuing. Three possible price targets were projected from there. Attaching the Fibonacci tool to the bottom at 1.10851 and dragging it to the top of the last pullback at 1.11718, the following targets were calculated. The first target was anticipated at 1.10314 (161 %) and was reached on the January 24. The second price target was predicted at 1.09447 (261.8%) and the third and final target might be expected at 1.08043 (423.6%).
If the resistance level at 1.11718 is broken, the anticipated scenario is annulled and the short position must be liquidated to protect trading capital.
By taking part of the position off the table when the first target was reached, the overall risk and well as mental pressure were effectively managed, therefore making it easier to leave the short position alone until either more targets are reached or the downtrend stops and the last of the position can be closed.
As long as sellers maintain a negative attitude and supply overcomes demand, the outlook for the EURUSD currency pair on the Daily time-frame will remain bearish.
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