EUR/USD – Not Really a Head and Shoulders Pattern; Just Ranging

EUR/USD 1H Chart 10/3/2012 9:35AM EDT

EUR/USD 10/3/2012 1H chart

Head and shoulders? The EUR/USD is held under the 1.30 level, finding resistance at 1.2967. In the 1H chart, it looks like a head and shoulders pattern is developing. In it of itself, yes – there is a couple of shoulders and a head with the neckline near 1.2880. However, in the real sense of what head and shoulders pattern is suppose to represent – a topping pattern – this is not the case.

Ranging: Instead EUR/USD is just choppy and ranging, actually with a slight and very short-term bullish momentum bias. The 1H RSI reading tagged 70, and has so far remained above 40. Returning the 1H RSI above 60 would be a sign of bullish continuation momentum. Still a break above 1.30 will be needed to put on a stronger bullish outlook back in the short to medium term.

If the market instead pushes the EUR/USD below 1.2875, it would have cleared the neckline of this “H&S” pattern, which to me is just the “central pivot” of a range. This would simply take away the near-term bullish bias when the euro-us dollar was able to crack a previous resistance pivot, especially if the RSI also falls below 40. The bearish outlook however will be limited to the 1.28-1.2815 area, the lows of the recently developing range.

Key trendlines: While we monitor the short-term “noise”, we should be aware of the trendlines that are converging. (1: declining from April 2011, 2: rising from July 2012), seen in the daily chart. The point is that any bullish or bearish outlook at the moment should be limited.

There does seem to be more space to the upside than downside. The declining trendline will probably be around the previous 1.3170 high or up to 1.32 handle for a rally that starts soon. To the downside, the rising trendline from July is spotted near 1.2750, maybe a bit lower for an immediate decline.

EUR/USD Daily Chart 10/3/2012 9:40AM EDT

EUR/USD 10/3/2012 Daily Chart

Fan Yang CMT is a forex trader, analyst, educator and Chief Technical Strategist for FXTimes

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