The EUR/USD daily Forex chart has rallied strongly for 3 weeks. The rally is within a 4 month trading range. Since it has 3 legs and it is in a tight bull channel, it is a parabolic wedge buy climax.
The 3 week rally on the EUR/USD daily chart has been strong. Because it is in a parabolic wedge, the odds are that the bulls will soon be exhausted. Consequently, the daily chart will probably go sideways to down for about a week before the bulls try again to break above the 2-year high. Because the rally has been very strong, the bulls might get one more brief new high this week before the pullback begins.
While a parabolic wedge rally can lead to a major trend reversal, it rarely will do so immediately. The bears usually need at least a micro double top, or an endless pullback. An endless pullback is a tight trading range that is sloped down slightly. Initially, it is a bull flag. However, if it grows to 10 or more bars, the odds of a bear breakout below the bull flag reach 40% or more.
This means that there is little downside risk for at least another week. Furthermore, the strong rally is still within a 4-month trading range. Since trading ranges resist breaking out into trends, they have many strong legs up and down. So far, this is just another. It is more likely that the trading range will continue than it is that this is the start of a bull trend.
Overnight EUR/USD Forex Trading
The 5 minute chart has pulled back 90 pips from yesterday’s parabolic wedge top. This selloff is more likely a bull flag than a bear trend. Consequently, bulls will be looking for a strong bottom or a strong rally for a swing trade up. There is none yet. In addition, the 3-week buy climax will probably need at least another week of sideways to down trading before the bulls try to resume the rally. Therefore the odds favor several more sideways days. Traders will therefore mostly scalp.
If there is a strong breakout within the next week, up is more likely than down. However, even if there is a rally above last week’s high this week, it probably will soon pull back. This is because a parabolic wedge rally is made of a series of buy climaxes. That is unsustainable. It therefore usually soon leads to at least 5 – 10 bars of sideways to down trading.