EURUSD Head + Shoulders, SP500 and AUDJPY.

Over the past few days the EURUSD FX pair has broken down through the neckline of a Head + Shoulders top pattern. The Head + Shoulders top pattern is one of the most familiar Technical Analysis patterns, though I also find that it can be one of the least reliable, possibly because it is so familiar. I do however have a few concerns with regard to this breakdown, and though I would prefer to be on the short side for now, I would also watch for the risk of a failed breakdown.

The Diagrams below show the typical type of set-ups associated with Head + Shoulder patterns. The basic set-ups are a 'Head + Shoulder Top' at the end of an uptrend, or an 'Inverted Head + Shoulder' ( 'Head + Shoulder Bottom') following a downtrend. There are also the 'Failed Head + Shoulder' patterns, these, in contrast to the traditional H+S patterns, are overlooked by many, yet are amongst the most reliable of patterns when they occur.
 

The chart below shows the EURUSD FX current 8 Hourly Chart. I have highlighted the current Head + Shoulder pattern, and an Inverted H+S pattern from May/June. One of the reasons for my concerns is the potential  Bullish Momentum Divergence which has occurred with this move lower. Note how there was no Bearish Divergence when the break of the neckline occurred on the prior inverted H+S. - It must however also be remembered that Momentum is a secondary indicator, and price direction takes priority. The EURUSD currently remains in a downtrend, and is bolstered by the break and re-test of the H+S neckline today, plus the recent flight from risk. However, I believe that unless the EURUSD takes a sharp turn lower over the next day or two, therefore overcoming this potential Bullish Divergence, then there is a decent possibility that this could morph into a 'Failed' pattern.  - (Mid-morning update. In the wake of strong German economic data, the EURUSD has shot up to 1.2710 (currently), resistance from the neckline of the H+S occurs at 1.2730/35. If the EURUSD can break over here and hold the break, then the odds move strongly towards the Failed H+S pattern, - initial target would be the top of the right shoulder in the low 1.2900s, a break over the top of the right shoulder, would strongly favour a move back to the early August high. - Note, if the EURUSD is not able to successfully break over the neckline at 1.2730/35, then the downside remains favoured.).

(Click on Chart to Enlarge)

Following the sharp moves lower on risky assets over the past 24 hours, the risk is firmly towards further losses in the SP500. I covered the main arguments for and against the SP500 in Friday's post, which can be seen by clicking here.  

Friday's post also mentioned that the AUDJPY cross, which has a good correlation with moves in US equity indices, looked technically in very poor shape, and maybe forming a Bearish 'Symmetrical Triangle' pattern within the lower half of the larger Bearish pattern. Since then this has moved sharply lower, and yesterday hit the lower side of this potential Bearish 'Symmetrical Triangle' pattern. A breakout through here would be a very Bearish development, with a measured target around 64.00 (See chart below). The breach of a the shallow rising momentum trendlines on the RSI and Momentum, is a potential warning shot that a breakdown in price may be due to occur.

 (Click on Chart to Enlarge)