The EUR/USD rallied strongly after yesterday’s FOMC report and it is testing the resistance of the February 11 lower high in the yearlong trading range. The daily chart has a nested wedge. There were 3 pushes up since the December 3 low, and the 3rd push up that began on March 2 has 3 smaller pushes up. This increases the chances of a reversal, but there is no top yet.
Also, I said last week that the strong reversal up on March 10 would probably have at least one more leg up after a pullback. The rally that began yesterday meets that minimum goal. This does not mean only one more leg up, and there is no sign of a top. However, whenever there is a 2nd leg up in a trading range, no matter how strong the rally, traders have to remember my 80% rule, which says that 80% of breakout attempts within trading ranges fail (and 80% of reversal attempts in trends also fail).
The bulls need a strong breakout above the February, October, and especially August lower highs before those who trade the markets for a living will believe that the EUR/USD is reversing up after the 2014 bear trend. The odds are against the bulls, but all trading ranges eventually end, and one of the breakout attempts will eventually succeed.
The math is much better betting that every one of them will fail. Only after one finally clearly succeeds should traders begin to trade the EUR/USD like a trend, and become willing to hold positions for weeks at a time. Until then, most traders will look for trades lasting only a few days and take quick profits.
The 5-minute chart has been pulling back in a bull flag for the past 3 hours, and has just begun to break out of the bull flag. Because of the series of buy climaxes on the 60 minute chart since the March 10 bull reversal, the odds are that a trading range will develop soon. This is especially true because that rally since the March 2 low has 3 pushes up (a wedge), it is testing a prior high (February 11), and it is around a measured move up from the March 10 gap.
That gap was created by the March 16 low testing the March 8 high. The March 10 rally was the gap. While there was no actual gap, whenever there is a reversal up from support with little or no overlap, I refer to that space as a gap, and it usually is followed by a measured move up and therefore is a variation of a measuring gap.
Strong rallies usually transition into trading ranges before they can reverse. The best the bears can hope to see is a trading range for the next couple of days. Since the odds are against a strong bull breakout above the February high when the rally has a series of buy climaxes, the odds are that the 5-minute chart will start to form a trading range today or tomorrow on the 60-minute chart. As long as the trading range has 20 or fewer bars, the odds still favor a bull breakout and at least one more small leg up.