I have been saying for the past week that the EUR/USD would probably test down to around 1.0800 because that was the bottom of a weak rally that began on December 23. A weak rally after a buy climax is usually a bull leg in what will become a trading range. That made the test down likely.
In the European session, the EUR/USD sold off for a few hours, but it has been sideways for the past hour. The overnight bear breakout was the start of a 2nd leg down in a 2-week trading range on the 60-minute chart. Trading ranges usually have many 2-legged moves. Since there is still room to the target below, this 2nd leg down might fall further.
The bears want the overnight selloff to create a measuring gap. This could happen if there is a bounce today that stays below yesterday’s trading range. The gap could be the middle of the move down from the December 28 high. As you might expect, the measured move projection is around 1.0800, which is the bottom of the December 23 pullback. The bears see that as the neck line of a head and shoulders top. Most head and shoulders tops fail to reverse a market.
Even if there is a breakout below, the odds still are that it will be bought. The December 3 rally was so strong that a deep pullback lasting a month or more was likely, and that a 2nd leg up from there is likely as well. The EUR/USD is probing to find where the buyers will come back and create that 2nd leg up. Less likely, the bears will succeed in pushing the market below the bottom of the December 3 strong bull trend reversal. Until they do, the probability favors a 2nd leg up.
New Year’s Eve is usually a quiet day for financial markets. They tend to spend most of their time in tight trading ranges. If the range is too tight, most traders should not trade. Those who do will use mostly limit orders to buy bear bars and below bars near the bottom, sell bull bars and above bars near the top, and scalp for 10 – 20 pips. If there is a strong breakout in either direction, they will swing trade, they instead expect breakouts to be brief and quickly reverse.