Demand For Bearish Bets On EUR/USD Rises On Head & Shoulders Breakdown

EUR/USD fell to 1.1640 on Wednesday after the ECB announced a dovish taper as expected. The common currency extended losses this Friday to 1.1616.

The daily chart shows head-and-shoulders breakdown, which is a bearish reversal pattern.

Daily chart

• As per the measured height method, the head-and-shoulders breakdown has opened doors for 1.1228.

Weekly chart

• Technicals seem to favor a drop to 1.1228 as indicated by a nice topping pattern, a bearish 5-MA and 10-MA crossover and the downward sloping RSI on the weekly chart above. 

Monthly chart

On the monthly chart, we see that a failure to hold above the downward sloping 50-MA has proved costly to the EUR bulls.

Also worth noting - Death cross (bearish 50-MA and 200-MA crossover) was confirmed in Oct 2016. Long-term moving average crossovers act as a contrarian indicator (in the short-run) and tend to work with a time lag.

As seen on the chart above - Confirmation of the death cross in Oct 2016 was followed by a nice basing pattern around 1.04 levels and a rally to 1.20 levels. The failure to hold above the 50-MA and a head-and-shoulders breakdown suggest that the bearish effect of the 'death cross' would come into play now.

Thus, the stage looks set for a drop to 1.1228 over the next 2-3 months.  

Options market - increased demand for put options adds credence to bearish reversal confirmation

• The open interest/open positions in the EUR/USD Nov expiry put options increased by 2,327 contracts, while the open positions in calls went up by 1,393 contracts.
• The bias is clearly bearish.

Also Read: EUR/USD risk reversals adopt a bearish bias after dovish ECB