Strength and Weakness analysis can help identify when a trend is going to end or when a trend is likely to continue.
EURGBP is showing signs that the trend is going to end and with price finding support, we could look for reversal opportunities.
Watch the video to find out more…
Today I’m taking a look at EUR and GBP as the two currencies are diverging towards each other on our strength and weakness table.
I have isolated the two currencies within a line graph. The blue line is a EUR, and the trend of this line is moving to the upside; while the orange line is the GB Pound, and it is trending lower.
That tells us that the GBP is the weaker of the currencies, and EUR has actually been quite strong.
When we separate the currencies in a line chart, we can see that they are heading towards each other. This suggests that the GBP is getting weaker and the EUR is getting stronger. This usually leads to a reversal in the market. Ideally, we want to see these lines cross to confirm a change of the trend but with the price at support, we could see a reversal.
If I were looking for a complete reversal in this market, I would be looking for the price to cross over. For instance, in December 2020, we saw the GBP crossover EUR. After that crossover, we saw a huge downtrend for the next few months.
So, I would wait for these two lines to cross for confirmation that we could see a change of trend.
The last time the two lines crossed was back at the end of December 2020, where the GBP (orange line) passed through the Euro (blue line) which caused the price to form a downtrend. The price fell by 570 pips. If the two lines crossed again, we could see a similar reversal move.
Now, we are at a key level at 0.8499. Why is that a key level? Well, when I use volume profile, I look at key areas in the markets where it has consolidated.
I look between these two areas where the market formed the double bottom pattern, and identify the most traded level within this area. The most traded level is 8499.
Now that we have established the strength and weakness of the currencies, we can look for other confluences. When the market formed the double bottom pattern on the weekly timeframe, we expected the market to test this area again. Using volume analysis, we have identified a high volume level at 0.8499. This is currently being respected by the market.
Today has been pretty good for EUR/GBP in terms of the strength and weakness.
EUR is definitely gaining more than the GB Pound. This gives me an opportunity to look for a reversal.
A couple of weeks ago, we did a video on EUR/GBP. We were looking for the market to break through the trendline resistance.
We did get the breakout, but we didn’t get any changes in trend because the price failed to break above the high at 8640. If the price closed above this high, that would have been the sign that the trend was going to change. However, that didn’t happen.
I would really like to see one of two things happen: the first thing is for the price to pull back towards the 8499 level and form a higher low for long positions.
Alternatively, if the price were to break through that 8640 level, it could also offer a good support level for EUR/GBP.
After establishing the support level, we need to identify the areas where the change in trend could occur. The first sign would be the price forming a higher low, which could happen with the support of 0.8499. Alternatively, we also want to see the market break through the highs at 0.8640, where the price recently formed a high to confirm the change in trend.
We have to wait for that change of trend. We’ve hit the key level at 8499. If we could see a reversal, it would be good to look for opportunities because the last time these two currencies crossed over, we had a decent move down.
The last time that happened was back in December 2020, which is this bullish candlestick. The price moved 570 pips from that level, which is the high of that candlestick.
If we were to get another crossover, could we see another 500 pip move back up into some resistance level?
Keep an eye on EUR/GBP. It’s definitely a chart that could reverse now due to the strength and weakness of the currencies.
Apply what you learned from this Forex Chart of the Day in your future trades with the EUR/GBP currency pair. The good news is that you can test your trading strategy risk-free. Sign up for a free Blueberry Markets demo account by clicking here.