The EUR/USD daily chart has pulled back from a breakout below last week’s bear flag. The 2 day rally is therefore a small bear flag.
However, there was a higher low double bottom on April 2. In addition, last week’s sell climax formed another higher low. When there are 5 legs in a trading range and higher lows and a lower high, there is a triangle. That is a Breakout Mode pattern. It is within a 5-month trading range, which is a bigger Breakout Mode pattern.
Everyone knows that there will be a breakout. But it is a mistake to assume that the odds of a bear breakout are much higher than those of a bull breakout. The chart could not be going sideways if traders felt that one side had a significant advantage. Until there is a breakout, there is no breakout. The bears and bulls have almost exactly the same odds.
When there is a Breakout Mode pattern, the 1st breakout fails and reverses 50% of the time. The successful breakout has a 50% chance of being either down or up. In the meantime, traders will continue to bet on reversals.
Bear Flag On Daily And Weekly Charts
The EUR/USD chart broke below yesterday’s low 15 minutes ago. This triggered a sell signal on the daily chart. But, the 2-day bear flag was made of 2 bull bars. That is a weak sell setup and so far, the breakout is small. There might be more buyers than sellers below yesterday’s low. If this is a failed breakout, the reversal back up might not come until tomorrow.
On the weekly chart, last week was a bear bar closing near its low and below the 20-week EMA. It is a sell signal bar. Today’s selloff also broke below last week’s low. This therefore triggered a weekly sell signal.
However, the weekly chart is in a tight trading range. Every breakout up and down over the past 5 months reversed within a week. Traders will expect this one to reverse as well.
But, this is the longest trading range in over 2 years. Therefore, traders know that a successful breakout is likely soon. If today’s breakout continues to grow and if there are two closes below the March low on the daily chart, traders will conclude that a bear trend has begun.
Overnight EUR/USD Trading
The EUR/USD 5-minute Forex chart has been in a bear breakout over the past 30 minutes. It triggered daily and weekly sell signals. So far, the bars and the breakout are not big.
However, traders know that the 5-month trading range is extreme. There is therefore an increased chance of a successful breakout. If the EUR/USD 5-minute chart accelerates down or trends down relentlessly today, it will have an increased chance of being the start of a successful breakout. If so, there will be many bear trend days over the next few weeks.
It is important to remember that every breakout over the past 5 months failed. Even though a successful breakout is overdue, the odds continue to favor failed breakouts until there are 2 consecutive closes on the daily chart below the trading range.
At the moment, traders will sell rallies today. However, if the legs down are small, traders will conclude that this breakout will fail. If this breakout begins to go sideways, day traders will look to buy a reversal up.