RSI Points to Lower EUR/USD

03/30/2011 4:00 am EST

Focus: FOREX

Currency traders are looking for a correction lower in the EUR/USD pair after the relative strength index (RSI) posted a bearish divergence. Here we review the key levels for potential trade set-ups.

Trend line support continues to hold in the EUR/USD and drop below 1.4020 (Monday’s low) would indicate a bounce off the upper trend line and a continued move lower.

To repeat recent observations, “A move above 1.4282 would shift focus to 1.4360 (61.8% extension of rally from 1.1875) and 1.4413 (100% extension of 1.2873-1.3855 rally).”

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Clearly, the longer the EUR/USD remains below its November high, the more likely it is that a high is in place. There is, in fact, relative strength index (RSI) divergence present on the weekly.

Remember, RSI is calculated using closing prices, and last week’s close was above that of the November close. The RSI reading did not confirm the higher close. This strong signal is worthy of consideration.

The EUR/USD looks poised for a correction as the bearish divergence in the relative strength index continues to pan out, and we will look to sell the pair once it breaks down from the upward trend from earlier this year.

With the European Union (EU) scheduled to release the results of the commercial stress test on Thursday, the euro is likely to face additional headwinds going into the middle of this week, and the EUR/USD could be carving out a top in March as the near-term rally fails to produce a test of the November high (1.4281).

In turn, we will sell the EUR/USD on a close below 1.4000 and will look for a test of the 50-day simple moving average (SMA) at 1.3797 with the stop at 1.4052, the March 17 high.

By Jamie Saettele of DailyFX.com

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