But might need one more leg down first.
While the daily chart of the EUR/USD has a lower low double bottom with last week’s low, it has been in a trading range for 50 bars. Since reversals usually come from at or below support in trading ranges, the odds favor a little more down before a 100 – 200 pip rally.
The daily chart has been in a bear channel for 4 weeks. Since last week formed a bull reversal bar and a lower low double bottom, a rally to last week’s high might have begun. Yet, when a market is in a trading range and just above support, the market usually has to reach or fall below support before it can reverse up. Therefore, traders expect one more push down to test the January 11 low. But, if the daily chart forms several consecutive strong bull trend bars from here, they will conclude that the bottom is in.
The bears want a strong breakout below that major higher low. In addition, they want a break below this year’s low and then a test of par. Because this selloff has been weak, it is more likely a bear leg in a trading range. Hence, it will probably lead to a bull leg and not a bear trend.
Overnight EUR/USD
While the 5-minute chart rallied 40 pips overnight, it is still in its 3-day trading range. The reversal up has not been strong. Furthermore, it is at the top of a 3-day wedge bear flag. The bulls want a strong breakout above last week’s high. Hence, they are hoping that the 4-week selloff has ended and that a higher low major trend reversal has begun. Because of the magnetic pull of that January 11 low, there is more than a 50% chance that the daily chart will have one more leg down to that low.
The bulls need a strong reversal up above last week’s high before traders will believe that the 200-pip rally to the February 2 top of the 2-month trading range has begun. Hence, the odds still favor one more push down.