The EUR/USD daily chart bounced last week from a double bottom with the November 21 low. Since the December selloff was likely just a 50% pullback from the November rally, last week’s rally was a breakout above a double bottom bull flag. After a 2-day pullback, the bulls are trying to resume up to test lower highs above.
The EUR/USD daily chart rallies strongly in November, but pulled back in December. A pullback is a pause in a trend. When I use the term “pullback,” I saying that the odds are that the selloff in December will likely lead to a resumption of the November rally instead of a bear trend. While the selloff lasted several weeks and formed a head and shoulders top, it only had a 40% chance of a continuation down to the November 7 low before a test back up to the November 27 high.
Last week formed a double bottom with the November 21 low. In addition, the bulls were strong enough to keep last week’s low above the November 21 low. Last week the had a big bull bar. That was likely the start of a swing up to test last week’s high and possibly the November 27 high. While Thursday and Friday were bear days, they held above the big bull day on Wednesday. They therefore were probably only a pullback from Wednesday’s rally. The overnight rally is a resumption of Wednesday’s rally.
If the bulls get 2 or 3 consecutive bull trend days this week, they will test last week’s lower high. The need a couple of closes above that high to make traders believe that the rally will continue up to the November high.
Don’t ignore The Bears
The daily chart is in a 2-month trading range. It is nested within a 5-month trading range, which is in a 2-year trading range. Strong legs up and down are common. Yet, successful breakouts are rate. Consequently, no matter how strong a leg up or down is, the odds are that it will soon reverse.
Trading ranges constantly disappoint bulls and bears. While the bulls know that the probability favors them over the next week or two, the probability is not as high as they want. As a result, traders should never ignore the bear case.
The bears want the overnight rally to stall at or below last week’s high. This would then create a double top. That double top would be a right shoulder in their 2-month head-and-shoulders top. They need a strong breakout below the November 21 and December 12 double bottom. The odds of that are currently only 40%. If they get it, they would then try to test down to the November 7 bottom of the 5-month trading range.
Overnight EUR/USD Forex Trading
The context is good for the bulls this week since the daily chart is reversing up from a major higher low on the daily chart. In addition, the 5-minute chart has rallied 70 pips overnight in a tight bull channel. However, the rally lacked consecutive big bull trend bars. It therefore looks more like a bull leg in a trading range that the start of a bull trend.
Since there were several gaps below pullbacks and above breakout points overnight, this weak rally might in fact be a small pullback bear trend. If so, it can go a long way. The bulls need a strong upside breakout today or tomorrow. If they get it, the odds will favor another 100 pips or so up, and then a test of the November high, which is 250 pips above. Without it, the rally will probably stall around last week’s high, which is 70 pips above the current price.
While the daily chart looks good for the bulls, the 5- and 60-minute charts are less bullish. The bulls need a strong rally above 1.1860 this week. Without it, the 2-week trading range will likely continue. That means that the bears will then get a test back down to last week’s low.
The overnight bull channel is tight. That means that the 1st reversal down will be minor today. Therefore, bears will only scalp. Bulls will buy a pullback. While they can swing trade, most will begin to take profits unless there is a strong bull breakout today. This means that today will probably start to go sideways.