EUR/USD – Another Invalidation of Breakout

On Friday, the euro extended losses against the greenback and closed the week under the previously broken long-term support/resistance line, invalidating the earlier breakout. Will this negative development encourage currency bears to act in the coming week?

In our opinion, the following forex trading positions are justified – summary:

EUR/USD: short (a stop-loss order at 1.0967; the initial downside target at 1.0521)
GBP/USD: short (a stop-loss order at 1.2738; the downside target at 1.2157)
USD/JPY: none
USD/CAD: none
USD/CHF: long (a stop-loss order at 0.9708; the upside target at 1.0145)     
AUD/USD: short (a stop-loss order at 0.7873; the initial downside target at 0.7498)

EUR/USD

The first thing that catches the eye on the weekly chart is an invalidation of the earlier breakout above the long-term red support/resistance line based on the March 2015 and November 2015 lows, which is a bearish development.  Additionally, the CCI and the Stochastic Oscillator generated the sell signals, increasing the probability of further declines.

How did this drop affect the very short-term picture? Let’s check.

On Friday, we wrote the following:

(…) taking into account the size of yesterday’s strong bearish candlestick, the sell signals generated by the daily indicators (and the weekly CCI) and the fact that the pair remains under the long-term green resistance line based on the September 2000 and July 2001 lows marked on the chart below (in other words, an invalidation of the breakout and its negative impact on the exchange rate is still in effect), we think that further deterioration is just around the corner.

Looking at the daily chart, we see that the situation developed in line with the above scenario and EUR/USD closed Friday’s session under the red support/resistance line. Earlier today, the exchange rate moved a bit higher but then reversed and declined, which looks like a verification of the Friday’s breakdown.

Taking this fact and the long- and medium-term pictures into account, we think that lower values of EUR/USD are more likely than not. Therefore, if the pair extends losses, we’ll see a realization of the Friday’s scenario:

(…) If (…) EUR/USD declined below this line, invalidating the earlier breakout, it will be a bearish development, which will likely accelerate declines. Therefore, if we see such price action, the initial downside target for currency bears will be around 1.0521 (slightly above the late February and March lows).

Very short-term outlook:  bearish
Short-term outlook: bearish
MT outlook: mixed
LT outlook: mixed

Trading position (short-term; our opinion): Short (already profitable) positions (with a stop-loss order at 1.0967 and the initial downside target at 1.0521) are justified from the risk/reward perspective.

USD/JPY

On the daily chart, we see that although USD/JPY broke above the green zone and the February lows, the 38.2% Fibonacci retracement encouraged currency bears to act. As a result, the exchange rate reversed and declined, invalidating the earlier breakout. Additionally, the Stochastic Oscillator generated the sell signal, which suggests another attempt to move lower in the coming day(s). If this is the case and we see such price action we’ll likely see a drop to 110.92 or even a test of the recent lows in the coming week.

Very short-term outlook: mixed with bearish bias
Short-term outlook: mixed
MT outlook: mixed
LT outlook: mixed

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective at the moment. 

AUD/USD

Quoting our Thursday’s alert:

(…) although AUD/USD moved a bit higher in the previous days, it is still trading under the previously-broken lower border of the red rising trend channel, which suggests that this upswing may be just a verification of the earlier breakdown. If this is the case, it will be a negative signal, which will likely translate into a decline

From today’s point of view, we see that the situation developed in line with the above scenario and AUD/USD extended declines, which erased almost all the last week’s rebound. Additionally, the sell signal generated by the Stochastic Oscillator remains in place, supporting currency bears and another downswing. If this is the case, and the exchange rate drops under 0.7585, we’ll see a test of the green support zone in the following days.

Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed
LT outlook: mixed

Trading position (short-term; our opinion): Short (already profitable) positions (with a stop-loss order at 0.7873 and the initial downside target at 0.7498) are justified from the risk/reward perspective.