The Euro is showing early signs of completing a double top or similar reversal pattern. At the same time the medium term RSI looks a chance of completing a failure swing.
Here are some thoughts on how a technical trader may build a sell strategy around this situation
The daily chart has now made 2 significant peaks at around the same price.
At the same time the dashed red line looks as though it may be a significant support area. It stopped the market from below when price peaked there in mid- July. It then stopped things from above as price corrected from the first of the 2 double tops
So as things currently stand, a clear break under the dashed red support line would complete a double top and potentially set up for a more significant down trend.
However, a double top is not the only alternative here. Another possibility is that price washes around a bit more and forms some other kind of pattern e.g. a head and shoulder, wedge or triple top.
Using the RSI
To reduce the possibility of getting in too early and being caught in an ongoing sideways move as a more complex pattern forms or even a new uptrend, pattern traders will often wait for a break below the dashed support before selling a double top.
Some traders make an exception of this rule where an oscillator like the RSI indicates real weakness. This suggests a reasonable prospect that the current decline will go on from here to see the support taken out.
The clue to potential weakness here is in the good quality divergence between the RSI and price. The 14 day RSI is making much lower highs while price itself has made a higher high. Encouragingly, the first RSI peak was up in the overbought zone above 70%.
The other job the RSI might do here is to provide a logical framework for an entry strategy. One approach is to enter once the RSI completes a failure swing. This happens when the RSI takes out the support (low) between its 2 peaks. Once that happens, the RSI can be said to be trending down (making lower highs and lower lows).
While the RSI on the chart above has broken below the support this morning, it is calculated on a closing basis. For that reason, many traders will base RSI strategies around closing prices only i.e in this case, sell only if the RSI is below support when the daily candle closes at 0700 AEST tomorrow . If today's candle finishes above current levels, the RSI may not be showing as a failure swing tomorrow morning.
Using Moving Averages
This early entry strategy is based on an assumption that the RSI is giving a clue that the current downtrend will lead to a break below the dashed red support.
If price starts to rally, and wash around that represents failure of the early entry strategy. One approach is to use the 20 day moving average as a failure warning. The stop loss might be placed about 50 pips above the moving average to guard against this possibility
If a significant downtrend does get under way from here, the chances are we will see a retracement of the last major upswing. Based on that logic the 38.2% and 61.8% retracement levels may be used as starting points to develop a scaled or split approach to profit taking strategies.