EUR/USD – Head and Shoulders Under Threat?

Or just a correction?

It’s been an interesting few days for the euro dollar pair which has given back a portion of its losses after breaking through a major level of support.

The head and shoulders that formed since early December saw its neckline break last week, setting up a potentially decent correction of the large gains over the last 10 months.

Yet, already we’re seeing it making three days of gains and breaking back above the neckline. Does it invalidate the head and shoulders? I don’t believe so.

In fact, what we’ve seen is only a 38.2% retracement of the move over the last month and this coincides with the 55-day SMA around 1.21. A rotation off this level could be a bearish signal and confirm the downside potential.

Even a move towards 1.2150 and 1.22 wouldn’t be the end of the world, rather just represent a 50 or 61.8% retracement of the move. Perfectly normal under the circumstances.

Anything above here – and therefore the right shoulder – would be a concern and suggest the head and shoulders has burned out before it’s got going.

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