In true turnaround style, Euro rose broadly higher in face of fear-mongering headlines when Italy’s political crisis showed a whiff of a positive development yesterday. Whilst the turmoil in Italy will likely remain a key driver for Euro crosses, there are signs to suggest its downside has, or is already becoming overextended.
EUR/USD 1-W Chart
Looking at the weekly chart, EUR/USD is on track for a bullish hammer above two key support levels; the January 2017 trendline and November low (1.1553). We also note its failed attempt to break 1.1553 support on Tuesday occurred whilst price was overextended beneath its lower Keltner band.
Furthermore, as its currently within its seventh consecutive bearish week (open to close) and most bearish seven-week streak since December 2016, it only adds to the reasons for bears to tread carefully. So, should all the above make us outright bullish? Not necessarily.
EURUSD 1 Day Chart
Looking at the daily chart, a tight bearish channel remains intact even if the bullish two-bar reversal pattern is trying its best to undermine it. But the problem we’d have entering long now, or even after a break of the bearish channel, is that the bearish momentum which took Euro towards 1.1500 could still be the dominant force. So, whilst Euro does appear to be low hanging fruit around current levels, long positions are not likely to be the highest probability trade whilst bearish momentum remains the dominant force. Overextension can be a useful tool to avoid entering a trend at an extreme, and generally less reliable at picking the perfect peak or trough.