EUR/USD Potential Short Opportunity at Resistance Intersection

EUR/USD (daily chart as of March 17, 2014) made a fresh high on March 13 but failed to close strongly by trading below 1.3915, which was the high of both March 7 and 12. The March 13 session high of 1.3966 was right at the intersection of two important resistance lines, the medium-term resistance line (line 1) and the short-term support/resistance line (line 3), as shown on the daily chart.

The candlestick of March 13 looks bearish with a long upper shadow and long black body, indicating relatively strong resistance above, and also with a closing price that traded through the mid point of the previous long white candlestick body (gray shape on chart).

Warning signs at major support/resistance levels should be heeded. The euro may bounce back against the U.S. dollar after the March 13 sell off, but with the mentioned resistance barriers in place, the upside move may be limited. Note also that the pair is trading in a narrowing “rising wedge” pattern (between line 1 and line 2), which is considered a potential bearish pattern after an uptrend move.

European Central Bank President Draghi mentioned that the ECB’s forward guidance with an extended low interest rate policy may weaken the euro. However, it is still uncertain at this point whether the ECB would interfere, or prevent the euro from strengthening.

If the pair is unable to break out above resistance line 1, a range trading setup could be triggered with a good risk/reward ratio. A short trade could be in order if it is capped by line 1, with the first target at the daily EMA 50, and then potentially line 2 or the daily EMA 200. In the event that price breaks out above line 1 with follow-through price confirmation, that would invalidate this bearish outlook for the short term.

Support levels below:
1st support: 1.3830 (March 11 low)
2nd support: daily EMA 50
3rd support: 1.3640 (February 27 low)

Resistance levels above:
1st resistance: 1.3966 (March 13 high)
2nd resistance: resistance line 1
3rd resistance: resistance line 3