As EUR/USD nears its August 2015 highs, let’s take a look at how the pair’s price behavior will shape our trading strategy.
The Big Picture
It’s always best to gain some perspective by using a higher time frame and we favor the weekly candle chart for this purpose.
Notice how the price chart below is very minimal — no lagging technical indicators, no distracting fib lines, just key structural levels.
Using our minimalistic weekly candle chart we can quickly see the significance of the August 2015 highs at 1.1714. EUR/USD has essentially been in a sideways consolidation range for the last two years and the August 2015 highs represent the very top of this range.
Markets have a memory and if prices retest the August high, a major battle is likely to ensue between traders who got badly burned and traders who got richly rewarded at this level. These battles often create imbalances in supply and demand and that is what drives our trading edge.
Digging down to the detail of the daily candle chart (below) shows that a robust uptrend is in place.
EUR/USD has been stair-stepping higher since the turn of the year with resistance being broken and used as support on multiple occasions. In fact, EUR/USD’s ability to break resistance this year should make traders very wary of trying to pre-empt a reversal at the August 2015 highs.
We favor waiting for clear evidence that a reversal is in place before getting short. Sufficient evidence includes:
- Stop hunting false breakout – the market breaks through the August highs only to reverse and close back below. Best defined by long-tailed pin-bar candles, bearish engulfing candles and two-bar reversal patterns.
- RSI divergence – prices break to fresh highs but the RSI fails to follow suit, indicating that price exhaustion is creeping in.
- Break below daily ascending trend channel – this more conservative approach should offer the highest probability entry while sacrificing the enticing risk/reward characteristics of the other two.
Until we see clear evidence of a reversal we will continue to look for lower time-frame entries into EUR/USD’s daily uptrend.