The EUR/USD has been in a trading range for months and it has had many breakouts up and down, but the follow-through has been limited, as is the case within trading ranges. It had another strong bear breakout 20 minutes ago. Traders learning how to trade the markets should realize that the bear breakout bar was big enough to make it likely that there will be follow-through selling today and at least a measured move down. The bottom of last month’s trading range is 70 – 100 pips lower, and that is a reasonable target.
The bulls hope that this is just another failed breakout within the range. They need to halt the selling and then create a 60 minute reversal within the next hour or two before those who trade the markets for a living will believe that they have taken control.
I have written repeatedly over the past couple of weeks that a selloff was likely in the USD/CAD. At the end of last week, I said that a reversal back up for a few days was likely. Yesterday was the 4th day up, but the bulls created a strong breakout above a 60-minute head-and-shoulders bottom yesterday, and there might be more buying today before there is a pullback.
The bulls are hoping that the selloff was just a bear leg in a broad bull channel on the daily chart, and there is a 50% chance that they are right. However, the 4 day rally is now at a 50% pullback from the 3 week selloff, and there are always sellers at a 50% pullback. Bulls take profits and bears begin to sell, and the rally either stalls or begins to turn back down.
The overnight trading was sideways, and the rally has been climactic. The odds are that the bull breakout above this 10 hour trading range will not get very far and that the trading range will become the final bull flag before a bigger pullback forms over the next couple of days.
The momentum up on the 60-minute chart is still strong and there is no sign of a top yet. Bulls are continuing to buy. However, the rally will probably transition into a trading range today or tomorrow, and then have a pullback for a day or two.