The EUR/USD 60-minute chart broke above a 5-day tight bear channel overnight, and it has pulled back over the past 4 hours. The bulls are hoping for a higher low and then a 2nd leg up.
The daily chart has had a series of sell climaxes (big bear days) since its October 22 strong bear breakout. The selloff into yesterday was the 3rd push down (October 23 and November 10 were the first 2). Three pushes down in a tight bear channel is a parabolic wedge, which is a type of sell climax. Because the wedge channel is tight, we know that the bears are strong and the selling could easily continue down in a tight channel to below the April and March lows. However, because the selling is in a parabolic wedge, which is a type of sell climax, there is a 505 chance of at least a couple of small legs up on the daily chart over the next week or two. Traders are looking at smaller time frame charts for buy setups that would allow them to enter with a smaller risk. A buy setup on the 5-minute or 60-minute chart will have a stop that is closer than a buy setup on the daily chart.
The overnight rally on the 60-minute chart has 4 hourly bars with gaps between their lows and the 20-bar EMA. Since bars were entirely above the moving average, the market is telling us that the bulls are beginning to show a sign of strength and the bears are beginning to take profits. This is often the start of a trading range. A trading range has legs up and down. When gap bars form late in a bear trend, the odds are that the selloff that follows will lead to a test of the low and then an attempt at a major trend reversal. Most major trend reversals lead to trading ranges and not actual major reversals, but the leg up is usually big enough for a swing trade. Day traders will be looking for a higher low and a buy setup today or tomorrow for a at least a 100 pip rally. The rally might test the top of the November 13 trading range, which is about 200 pips above.
The bears want the bear channel to continue down to a new low of the year, but this minor sell climax gives the bulls at least a 50% chance of a bounce first.