The EUR/USD rallied from 1.1877 and climbed higher as the U.S. Dollar sank against a surging Euro. It was only once selling pressure overwhelmed the bulls that the EUR/USD began to retrace the uptrend.
The EUR/USD rallied from 1.1877 and climbed higher as the U.S. Dollar sank against a surging Euro. It was only once selling pressure overwhelmed the bulls that the EUR/USD began to retrace the uptrend. The questions now are: How much lower will the pair move, and will it resume the prior downtrend that preceded the bounce? One effective way of measuring corrections or retracements is by using Fibonacci patterns. The 240-minute chart has alerted a Three Point Extension pattern, which is formed by the recent sell-off (or move from point B to C) and the high (D), or projected turning point, which is expected to send prices lower. The D point, or resistance, is calculated based on the 121.7% Fibonacci Extension. Once prices confirm D as resistance the Three Point Extension is complete and Fibonacci Retracement levels of the move from C to D are calculated to project potential support levels as prices move lower.
Now that the EUR/USD has succumbed to selling pressure and the bears have taken control of market direction, there are a number of examples of how Fibonacci support levels can be helpful and offer guidance. One example: a short position taken from the D high (aggressive) could be traded lower to the 0.382 and 0.500 support levels – both of which are potential downside profit targets. While there is no way of knowing which Fibonacci-based support level will offer support or reverse the move lower, each should be treated as a level that could do either. A pullback lower than 0.618 would trigger more bearishness – this level is known as the “golden mean” and is often considered a deep enough correction to initiate a reversal. EUR/USD bears should watch the 0.618 level at 1.2102 very closely.
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