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The Euro Has Completed Its Initial Leg Down: What's Next?

Our recent Euro forecasts have been spot on--most recently calling for the Euro to decline without finding support until the $1.306 area. This is precisely where  the Euro stopped and just about where we are at the time of this post.

The Euro has respected just about every Fibonacci Level all the way down (the Fibonacci Levels are represented by the horizontal lines across the chart), pausing for a brief bounce at each level before descending lower. We have been the beneficiaries of this decline due to  our heavily increased short position  back on February 5th.

February 5th

February 25th

A large part of the easy trade has passed. I did not need a lot of technical analysis to tell me that shorting the Euro at the nosebleed levels of $1.37 against the US Dollar was a smart move at the time, but I did need technical analysis to help me chart the path lower and to know when and if to bail if the Euro had higher to run before succumbing to gravity. The next question is "Where does the Euro go from here?" Technical analysis may lend its hand to us once more, giving us a potential road map of what to expect, so that we can appropriately prepare and profit from the Euro's moves relative to the US Dollar.

 Head and Shoulders Formation?

I think it is possible that the Euro is in the process of completing an initial head and shoulders formation. This would minimally point to lower levels in the $1.27 range if the Euro breaks definitively below $1.30. Please note that this would take time to develop and would not likely be in a straight line. Further analysis is warranted to provide reasonable assumptions and boundaries along the way.

What has me fairly excited is that it is also possible that the Euro will not only be completing this head and shoulders formation started in January at the $1.30 level, but it might be in the process of completing a much larger head and shoulders formation from November, which was started in the 1.27 level.

If (and that is IF) this is the case, the symmetry would be beautiful indeed. The break of the smaller head and shoulders from January just so happens to work us down to the exact level that would form a much larger head and shoulders pattern started from last November. Price action from there would be the determiner of the overall direction moving forward, but, in the mean time, the short position against the Euro has the momentum.

I will endeavor to provide more technical analysis in the days to come to provide some boundaries and targets, but initially, I am expecting the Euro to decline to  at least the $1.27 level over time unless we see a basing or rebound from here that nullifies the head and shoulders neckline break. Stay tuned.

Disclosure: Currency trading involves a high degree of leverage and risk. Please do not participate in currency trades unless you employ strict control of risk and can afford to lose your entire investment.

Positions: Short the Euro, Short the Yen.

Written By: Joshua Ungerecht

Currencies, EUR/USD, Euro, Fibonacci Levels, Forex Trading, Head and Shoulder's neckline, Head and Shoulders Formation, technical analysis, US Dollar