EUR/USD Is Setting Up For A Short Term Bounce

Past few weeks have been quite brutal for the single currency of the eurozone against the greenback. By Memorial Day, EUR/USD had declined everyday in May except for two. Now it seems that the pair may be setting up for a bounce.

Since mid-February, EUR/USD has been forming a descending triangle. The lower boundary line was formed by the lows reached on February 16th, March 15th and April 15th. The upper limit was formed by the highs of February 29th, March 30th and May 1st. Notice the lows were reached around mid month and the highs by month end – roughly one-month or 22-Day trading cycle.

On May 9th, the pair decisively broke below the lower boundary line. The break was roughly half-way to two-thirds of the triangle elapse-time. The triangle height is 511 PIPs – from the high of H1 to the low of L1 on the chart. This gives an estimated move of the pair on the downside to 1.2464 (L1 is 1.2975). The low reached on Friday May 25th was 1.2496.

Though EUR/USD seems to be headed towards testing the June ’10 low of 1.877, it might be ready for a short term bounce.

The pair is also in oversold territory. Its 9-Day Relative Strength Index is showing a divergence. RSI reached a low of 12.12 during the early May’s decline to 1.2667. (Note the cycle low was again reached in mid-month) The RSI did not make a fresh low during the next down leg in the second half of May.

Last time RSI had similar divergence was in mid-January – see S3 in the chart. Then it retraced 50% of the down move (up to H1 on the chart). The divergence in January took four weeks to form but the current one took less than two weeks.

The pair is also within a support zone – see points S1, S2, S3 on the chart.

EUR/USD has declined for many days without a significant bounce. In the course of past few years, most similar declines or advances were accompanied by a bounce reaching the Fibonacci retracement levels of 38.2%, 50% or 61.8% of the move.

If EUR/USD behaves consistently with its previous chart patterns then it might retrace part of May’s decline. A 38.2% retracement will take it to the first resistance – R1 on chart – May 21st high of 1.2825 or 300 PIPs from Friday’s close. A 61.2% retracement will take it to the triangle channel break line of 1.2975 roughly 450 PIPs from Friday’s close.

For the past few weeks, EUR/USD has been held hostage by the ongoing Greek tragedy. The next chapter of this story will be released after the June 17th elections in Greece. The actions of the three major actors – ECB, EU and Greece – of this saga will have significant impact on the direction of EUR/USD. The alternatives available to them are not many.

Prodded by Germany, EU is insisting upon sticking with austerity measures in Greece. Syriza, the leading party in Greece does not want austerity. They are headed for a collision. Outcome will be either Greece leaves the euro or continues with severe austerity programs. First alternative increases the uncertainty about the survival of the single currency and the second about the survival of the Greek state.

The choices available to ECB are either do nothing or embark on a QE to inject some growth in the continent. Both alternatives are euro currency negatives.

So, the chart and the events happening in Europe indicate that there is more downside to this currency pair. Hence, any bounce now will quite likely be a dead-cat one.

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