Last week I highlighted 1.1375-1.1525 as being a massive resistance level for the euro against the dollar, stating that a break above here would be very bullish.
That was before the markets experienced immense levels of volatility on Monday which worked strongly in the euros favour, apparently due to the unwinding of carry trades. Whatever the reason, the euro rallied through this resistance area with relative ease.
But that doesn’t mean that this level is no longer key, nor does it mean the pair is particularly bullish, yet. As we’ve seen from the markets today, there isn’t much we can read into moves at the start of the week except that they are prone to fear-driven panic which creates exceptional levels of volatility and a flight to safety.
From a technical standpoint though, we should learn how bullish this pair really is in the next 24 hours or so.
Today we’re seeing the pair reverse much of the gains made on Monday and it’s now closing back in on 1.14, around the level it opened on Monday.
If it closes below Monday’s open, it would strongly support the view that yesterday’s move reflected panic rather than the significant shift in bias that a break would have done in ordinary market conditions.
It would also create a bearish engulfing pattern on the daily chart which is quite a bearish setup in normal circumstances. Given the size of yesterday’s rally, I believe this is even more so.
If on the other hand the euro rallies into the end of the session and we see a close above 1.1525, the upper end of the resistance range, it would suggest yesterday simply provided the trigger and market bias is in fact bullish, even at these levels.
A close in between 1.14 and 1.1525 would represent indecision and price action over the next couple of days should hopefully provide further clarity.
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