The downside extends to oversold levels in the descending channel

• EUR/GBP continues to fall in a descending channel.
• It has reached oversold levels and could be poised for a comeback.

EUR/GBP continues to fall in a descending channel. The descending sequence of highs and lows indicates that the pair is in a short-term downtrend, and since “the trend is your friend”, this is influencing prices to further weakness.

EUR/GBP 4-hour chart

The pair landed on the lower channel line, a historical support level that previously provided the springboard for higher countertrend reactions. There is a chance that the same thing will happen again.

The Relative Strength Index (RSI) is heavily oversold, indicating traders should not add to their short positions as there is a greater risk of a pullback. The RSI can remain oversold for long periods while prices continue to fall, but EUR/GBP has now been oversold for 14 periods on the 4-hour chart, which is already quite long. Traders should wait for RSI to break out of oversold at the close and re-enter neutral territory before placing buy orders.

EUR/GBP has now broken below the 200-period simple moving average (SMA) and the 0.618 Fibonacci retracement level from the late June and early August rally – both bearish signs. On the daily chart (not shown) it is trading just below the key 50-day SMA, but it is difficult to tell if it has decisively broken below the 50-day, which could provide support for a pullback.

The price itself formed a reversal pattern of the Japanese Hammer Hammer candlestick on August 23 (bold rectangle in the chart above). This was after it briefly fell below the channel line, then recovered within the same 4-hour period. The pattern was followed by an upward green candle, providing bullish confirmation of a near-term recovery. However, the price has failed to rise so far. If EUR/GBP breaks below the lows of the Hammer candle at 0.8453, this will signal further downside. If the low keeps the hope of a recovery alive.

Given the short-term downtrend in EUR/GBP, there is still a chance of another break below the channel line. A decisive break below the lower channel line would validate such a breakout. It would be a very bearish sign, but the move down is unlikely to last long. Such movements are often signs of exhaustion.

A decisive break would be one accompanied by a longer-than-average red candlestick that closed below the channel line near its low, or three red candlesticks in a row that broke below the level.

The long-term trend (weekly chart) is still bearish, while the medium-term trend is bullish.