EURUSD faces a test of resistance

STRONG rebound in the EURUSD three weeks back seems to have come to a halt as it faces a test of resistance beneath the neckline of a completed head and shoulders formation. In this article, we will share insights on our observations and outlook on the EURUSD.

Firstly, a major head and shoulders pattern could be observed on the weekly chart. The pattern can be identified when prices form three peaks with the middle peak being highest, known as the head. Shoulders would be the first and third peak that are shorter than the head and almost equal in height. This pattern stretched back to July 2020, bounced off the neckline on several occasions before finally breaking down from the level in July this year. A head and shoulders pattern is normally a bearish reversal pattern that may trigger further downside upon its completion.

On the other hand, another indication that may support the bearish outlook on the pair is the Relative Strength Index (RSI). After falling below the neutrality zone of 50 in early June this year, the weekly RSI failed to advance above 50, which usually signify a bearish signal. RSI is a momentum indicator that suggest overbought conditions when it's above 70, and oversold when it's below 30. In a downtrend, the RSI tends to be trapped beneath 50. As seen in the charts, EURUSD's RSI was rejected briefly after hitting 49 last week. Moreover, a bearish divergence on the RSI that formed across the head and shoulders pattern reinforces the view that the pair is under pressure. Bearish divergences are identified by higher highs in prices but lower lows in RSI reading.