EUR/USD Mid-Session Analysis for December 6, 2012

After reaching a high of 1.3126 for the week on Wednesday, the EUR/USD formed a closing price reversal top on the daily chart, setting up a potential retracement equal to at least 50% of the last rally.

Based on the near-term range of 1.2660 to 1.3126, the next likely downside target or value zone is 1.2893 to 1.2838. Previous reversal tops have led to 50 to 61.8 retracements of their last rally over a 2 to 3 day time period. This is said to be because this chart formation draws the attention of counter-trend traders.

Although the reversal top is often thought of as negative sign, it is the actual follow-through break the day after the pattern is formed that actually sets the sell-off in motion. Without the follow-through selling pressure, the previous day’s move is just a normal higher-high, lower-close. Yesterday’s pattern was confirmed when 1.3059 was taken out with conviction earlier in the session.

At the mid-session, the EUR/USD is trading lower, but Friday’s U.S. Non-Farm Payrolls report may mean that trading action will flatten out into the close. Tomorrow could prove to be a volatile day with the Euro poised to continue its move down to 1.2893 or it may reverse course through 1.3139, well on its way to 1.3200.