EUR/USD got a bearish boost today from the European Central Bank, enough so that this simple head and shoulders setup was too good to pass up.
Head & Shoulders Break on EUR/USD?
In case you missed what the fuss in the euro was about today, the European Central Bank made a few changes to their monetary policy today. They decided to scale back their monetary policy stimulus by half to 30B euros per month, but they did extend the program by nine months and did reiterate that rate hikes are not likely after the bond buying program ends. This is all viewed as a very cautious approach to unwinding the stimulus, a decision made because of the “stubbornly low” inflation conditions.
So, basically what we have here in EUR/USD is potential for the Greenback to gain ground with expectations of further rates hikes from the FOMC, as well as the potential positive sentiment gains for the U.S. now that the U.S. House Passes the budget plan, making way for U.S. Tax Cut legislation. Finally, we do have a USD catalyst tomorrow with the Advanced U.S. third quarter GDP reading, which my main man Forex Gump thinks will likely show faster growth based on the leading indicators. Could be a short-term bullish catalyst for the U.S. dollar if this is the case since expectations are for a slight downtick from Q2’s final estimate of +3.1%.
Technically, on the four hour chart above, I’m seeing a neckline break of a longer-term head and shoulders pattern that’s been in the works since August, and now that I have a major fundamental driver to support the downside move, I decided to play this setup to the short side.
I’ve already gone in short at market, and my stop will be the usual one weekly ATR to give the trade plenty of breathing room, and my initial adjustment target will be the major psychological level that held as resistance in the past and broken this year. Here’s what I’m doing:
Short half position EUR/USD at MARKET (1.1650), max stop loss at 1.1820, initial target at 1.1500 where I’ll reassess for next adjustment.
I’ll be risking only 0.5% of my account on this position and as usual, I’ll look to make adjustments if my first target is reached, which would likely to be adding to my position/roll down my stop to max out the trade if the momentum is still strong and the fundies support further moves lower.
As always, remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t simply follow what I do.
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