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This week we saw two currency pairs set up with just about perfect reversal chart patterns. I will outline it here on the EURUSD but you should look on the AUDUSD for it on the Daily chart.
A head and shoulders pattern consists of 3 peak highs, the left shoulder, the head and the right shoulder. The left shoulder is established when the market find a high/resistance and falls back down for a short time. Then the market retests and eventually will peak at some point above the previous high, forming the head, and falls once again back below the previous left shoulder. After a short time will then rise back to test the same level as the left shoulder. At this point the expectation is that the market will once again fall and begin what could be a change in the trend.
On the chart below you can see the head and shoulders indicated by the green X’s.
Now that we have seen the fall from the left shoulder it has reached a critical decission area highlighted in green. If the new downtrend is to be confirmed it must now break the previous supports and create lower lows.
Click on image for larger view
