EUR/GBP Faces Strong Resistance

Tuesday, 12 October 2010

Times have been tough in the Forex market recently, however when setups like the one we are about to talk about come along – uncertainty is the last thing you want to be thinking about. Today, we'll be looking at the EUR/GBP pair, on a weekly basis, to see whether or not the current stellar uptrend can continue or not.

The first thing worth noting on the weekly chart is that there is a long term downtrend in place. This dates back as far as October 2008 – which is where the high of the trend was reached. On the way down a series of lower highs have allowed us to draw a trendline sloping at a fairly steady rate – about 100 pips per month.

In the last few weeks, price action has pushed the currency pair much higher – to the point where it is now sitting just a few hundred pips away from the long term resistance line.

We need to say something here about longer term resistance. It is obvious that resistance definitely does play a factor in technical analysis – however when you are analysing long term resistance, it is much more powerful than shorter term resistance. In other words, the trend line we have drawn on the current chart is extrmeely powerful – because it spans the best part of 2 years.

The logic here is that if the price action breaks the trend line – the entire trend which has continued for over 700 days is negated. The market doesn't take this lightly.

Adding to the idea that the EUR/GBP is about to reverse are a number of technical indicators. Firstly – we have the Stochastic indicator on this pair. The indicator is curently well above the 80 level – which might indicate that the currency has gone a bit too far in the upwards direction.

Furthermore, the 200 period SMA (which is highly significant on the weekly chart – is sitting a fraction above where the current price action is. This SMA will also act as a massive level of resistance, and therefore we expect the currency pair to come under pressure all of this week (given the proximity of the SMA).

Finally, we've placed a Fibonacci retracement on the recent high and low made by the currency pair (earlier this year). Funnily enough, the 50% level (arguably the most significant and effective turning point) is just 20 pips below the price at the start of the week.

So where to from here? Our guess is that the currency pair is headed for a pretty swift reversal – starting this week.