EURGBP Approaching A Sell Zone

I’ve been watching the chart of EURGBP for a number of weeks and there could be a selling opportunity coming up in the next week. So below is an analysis of what is shaping up and how best to take advantage of it.

Like most EUR pairs, EURGBP has been in a down trend for a number of months. This is partly due to GBP strength which has kept the pound propped up against other currency pairs on the basis of the UK having a stronger economy than almost all the Eurozone countries. This is likely to continue as the problems of the EU are likely to remain on investors minds for some time meaning it is difficult to see the Euro strengthening any time soon without a significant change economically. The Euro zone is heavily in debt, recovery is very slow and sporadic across the continent and Greece is still in a tough spot. What this means is that any rallies in Euro pairs are likely to be short lived and need to be considered as selling opportunities.

The Big Picture:

If you look at the Weekly chart of the pair, you will see that price is in a downtrend with a current retracement taking place. Since the dominant bias is down, we want to be looking for selling opportunities in line with the dominant trend.

Price is below the 50 and 200 EMA’s further adding to the bearish outlook and we can see that a recent support level at 0.7760 has also been broken. This is clearly sellers territory and the question then becomes where is the best place to sell? Classical technical analysis theory tells us that support should turn into resistance and so the level of 0.7760 could be a good place to short from.

A Closer Examination:

The daily chart below shows price has been in a sideways range for the last 7 months. We can see the highs of this range around 0.7400 and the lows being around 0.7000. Price is currently approaching the highs of the range and could turn south from here.

The above range bound price pattern is interesting because normally once price get’s squeezed into such a range, it often explodes out of it in the direction of the preceding trend which in this case is down. There is another scenario which could unfold also – a reversal. If price consolidates and becomes range bound at the end of a sustained move down like we have seen over the last few years on this pair then it could signal the beginning of a trend reversal as large institutions take time to unwind their massive positions.

You see, what drives the trends on the weekly charts which last for a number of years is big banks, hedge funds and other institutions who hold large short positions in line with their long term view. If they believe the EURO is likely to head down over the next few years then they will hold the short position for a number of years. What happens is that once their profit objective is achieved or their view point changes then they start to unwind their positions. Due to the size of their positions, it takes them time to unwind and to adjust their perspective to now be long having previously been short.

Here are how EURGBP could unfold and as traders it is our job to be prepared for every potential eventuality:

Short Trade:

Scenario 1:

Price could head down off the high’s highlighted in blue. This is the last line of defence for a while so we need to see price fail to go higher than 0.7480 as the absolute maximum. What I will be looking for here is price struggling to go any higher as this will signal weakness for a short.

Scenario 2:

Price could blow past 0.7480, in which case we would be looking for the short from 0.7760 which is the strong support mentioned above. Again I would want to see price struggle once it gets to 0.7760 or push above it and get pushed back down almost immediately. This would signal weakness and indicate a good place to short from.

Long Trade:

If price breaks 0.7480 then we could look for the long trade towards 0.7760. What I would want to see would be price push aggressively above 0.7480 and then several days later come back to retest 0.7480 as support.

The Waiting Game….

Now that we are clear on what we are looking for it’s simply a case of waiting until our setups occur. If they do occur then we have a trade to take. If price does something completely different then we can examine it at that time. For now, we wait….