Forex: EUR/USD trading range has been squeezing down

This currency pair has moved mostly sideways for the past three weeks. The trading range was established by a low on October 28th of 1.2326 and a high on October 30th of 1.3299. Since then neither the high or low has been exceeded by price action. Long term trades are on hold but there has been plenty of range for active intraday traders to make profit.

The trading range has been squeezing down. This may turn out to be a descending triangle with a strong probability of a downside breakout, but it’s a little too early to confirm that just yet for reasons which I’ll explain under the ‘Technicals’ section below.

The week was not without it dramatic events – especially the 191 pip gap down when the market opened on November 16th. The typical reaction is for the market to close the gap and that is what happened, but without obtaining new highs or lows.

In a compressing market it appears that little is happening. The opposite is true. Pressure will build until either the bulls or the bears assert control with a resulting breakout from the formation.


EUR/USD chart as at 19 November 2008 using NextVIEW Advisor

TECHNICALS

1) This three week sideways market has taken the shape of a breakdown, or descending triangle, which is not yet confirmed. Bias is to the downside.
2) Several technical indicators are dramatically oversold. This is especially clear on a weekly chart. The market will search for strong enough support to launch sideways or upward correction, to ease the oversold condition.
3) In the last fifteen years the market has never been so far away from it’s 200 day moving average. Over time there is a tendency for the market to revert to it’s centre, which would be much nearer to this significant moving average.

R1 – Nearby resistance at 1.3298
R2 – 1.3938
S1 – Nearby support at 1.2326
S2 – 1.2064

Conclusion:
A close above the down sloping trend line would indicate a probable move at least to R1.
A close below 1.2326 will confirm the triangle and presage a move to 1.2064 or beyond.

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Article and Commentary by Don Schellenberg. A trader and trading coach, he is a noted expert on Market Structure, Elliott Wave and Fibonacci. He trades the forex market.