The EUR/USD reverses up strongly last week on the daily chart. It has been forming lower highs and higher lows since last March and is at the apex of a triangle. The pattern has a series of shrinking 2 legged moves, as is usually the case in a trading range and especially in a triangle. As strong as Friday’s bull reversal was, it was also a 2nd leg up in a triangle, and the follow-through will probably disappoint the bulls.
A triangle is a breakout mode pattern, which means that the probability of a profitable breakout up or down is about equal. Also, there is only a 50% chance that the 1st breakout will be profitable. There is also a 50% chance that the breakout will reverse. This means that traders will have to be quick to make decisions if there is a breakout this week. Wednesday’s FOMC report might provide the excuse for the breakout.
Since Friday was a buy climax in a yearlong trading range, the odds are that the bulls will be disappointed by the lack of follow-through buying today. Today will probably be a small trading range day.
The 60-minute chart is forming a double bottom bull flag, but the range has been small for the past 5 hours There was a wedge bottom on the 5-minute chart in Europe, and there has been a 30 pip bull breakout over the past hour. The 1st reversal down will probably be bought, and there will then probably be a 2nd leg up, but the pattern is small and online day traders will probably scalp for 10 – 20 pips.
This trading range on the 60 minute chart is forming a triangle, and it is nested within the yearlong triangle. This is a nested pattern, and it is a sign that the EUR/USD is preparing for a sharp breakout. However, betting that any rally or selloff will be the start of the big move is a low probability bet since 80% of attempts to break out of a trading range fail. Until there is a clear breakout, those who trade the markets for a living will continue to take profits near the top and bottom, no matter how strong the legs up and down are.