The daily chart has pulled back to its moving average after a buy climax at resistance. Since the channel is tight and the lower high does not have many bars, a pullback into a trading range or bull flag is more likely than a trend reversal. Because of the hesitation at the moving average, the bulls might get 1 more new high before pulling back to the July 26 bottom of the wedge bull channel.
The daily EUR/USD Forex chart has been sideways for 3 weeks after a failed break above a tight bull channel. Since that channel is a wedge, the odds favor a test down to the bottom of the wedge. Hence, traders expect a 300 pip pullback to the July 26 low. While it is possible that the correction falls to the July 5 bottom of the bigger bull channel, that is unlikely without first going sideways for a month or two.
Since this is the 1st pullback to the moving average in over a month, it is a 20 Gap Bar buy setup. Typically, this 5 day double bottom bull flag would rally to a new high. However, the buy climax at resistance is probably more important. Therefore, many bulls will not buy until the pullback tests the bottom of the parabolic wedge. Hence, it is more likely that this reversal will continue down to the July 26 low before the bulls will buy aggressively again.
Minor reversal likely
Since the bull channel from the July 5 low is tight and last week’s lower high only had a 3 day rally, the odds are that the lower high is too small to create a major reversal. Consequently, the current selloff is probably minor. That means it will more likely lead to a bull flag or trading range than a bear trend. However, if it lasts 20 or more bars, it will create a trading range. At that point, it could form a top that would have at least a 40% chance of leading to a reversal down to the July 5 low.
Overnight EUR/USD Forex trading
The 240 minute EUR/USD Forex chart turned down yesterday from a double top lower high. It sold off more over the past hour. The bears want a strong break below the August 9 neck line of the small double top. They would then look for a measured move down to the July 26 low. Because this is a reasonable top on the 240 minute chart, bears who are day trading will look to swing part of their shorts.
However, unless there is a strong bear break below last week’s low, bulls will continue to buy reversals up. This is because the chart is near the bottom of its 3 week trading range. In addition, this selloff is still a pullback to the daily moving average and the daily chart is in a bull trend.