EUR/USD Options: Investors eyeing completion of Head & Shoulders pattern

The EUR/USD pair left another lower high at 1.1879 last week and fell to a 6-day low of 1.1755 levels this Tuesday morning.

The widening of the US-German 10-year yield spread seems to have weighed over the common currency. The daily chart below shows the spot could be forming a bigger head-and-shoulders reversal pattern.

Daily chart

The chart shows:

• A rejection at the confluence of 50-DMA (red line) and head-and-shoulders neckline last week. The small head-and-shoulders reversal was confirmed on September 26.
• A bigger head-and-shoulders is in the making. The neckline support is seen around 1.1668 levels.
• Stochastic and RSI favor further losses in the pair.
• The 100-day moving average is still sloping upwards.

Technical view - the spot looks set to extend losses to head-and-shoulders neckline support of 1.1668. A break lower appears unlikely, given the 100-day moving average is still sloping higher...

EUR/USD November expiry options data published by the CME shows adds credence to the bearish technical view.

EUR/USD EUUX7 Open Interest Change: Current (Oct 16 - Prelim) vs Oct 10

• Over the last week, the open interest/open positions in the put options increased by 4175 contracts. Meanwhile, the open interest in call options has gone up by 2283 contracts.
• Clearly, the cheap out of the money put options are preferred as a hedge against a potential sell-off in EUR on Catalan crisis.

Open interest chart

Max open interest build up is seen in 1.20 call and 1.1650 put.

View

• The EUR/USD pair is likely to test 1.1650 (head-and-shoulders neckline support at 1.1668 + big build-up in 1.1650 Put).
• On the higher side, a break above 1.20 would accelerate gains in the EUR/USD spot as call sellers would be forced to unwind their short positions.