EUR/USD: Sell Climax, But Minor Reversal Up

The daily chart has consecutive sell climaxes. While this is a strong bear trend, it is also unsustainable. Because the stops for the bears are so far above, risk is now big. Institutions will therefore probably use this climax to reduce their position sizes. Hence, they would be reducing their risk.

A parabolic wedge bottom often leads to a 10 bar, 2 legged rally. Furthermore, the rally can be strong. However, the 1st bull breakout above a tight bear channel is usually minor. The odds are that the bears will see it as a bear flag. Hence, they will sell the rally. Therefore, the bulls will probably need at least a small double bottom before they can create a swing up.

Since the momentum down is so strong, the bears have a 50% of breaking below the December 2015 low. That is the neck line of a double top bear flag on the monthly chart. Because of the 18 month trading range, the odds are that there will be buyers around the December low. Yet, bear will sell any rally, betting on a bear flag.

After 2 big bear bars closing on their lows, the bulls need at least a micro double bottom over then next couple of months. While the bears want strong follow-through selling below the December low, the odds favor at least another month or two of sideways trading.

A double top bear flag late in a bear trend like this often becomes the final bear flag. Yet, the trend often falls for a measured move down before there is a reversal up. Because the 18 month trading range is more than 1,000 pips tall, the selloff could extend down to below 0.9500 before there is a significant rally.

The bulls will try to buy around the bottom of the trading range. They want to prevent a strong bear breakout. Hence, they want the trading range to continue. If they are successful, they will then try to create a buy setup within the range. Because the momentum down is so strong, the bulls will probably need at least a month or two of sideways trading to create a credible buy setup. Even then, this 2 week selloff was very strong. As a result, the 1st reversal up will probably be minor. It would therefore probably form a bear flag for at least one more test down.

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The daily chart broke above yesterday’s high. This is the 1st pullback in an 8 day bear micro channel. Hence, the reversal up is probably minor. Therefore it will likely create a bear flag. Furthermore, there is still room to the support of the December 2015 low. Yet, because the selloff has been extremely climactic, this rally might be the start of about 10 days and 2 legs sideways to up.

Because the bear channel has been so steep and tight, the odds are that the bulls will need a major trend reversal. Therefore, the 1st rally will probably only be a show of bull strength. The bear trend will probably then resume. If the bulls are able to reverse up again, that would be a major trend reversal. Since only 40% of major trend reversals become opposite trends, the odds are that the reversal would more likely be the start of a big trading range. That range could last for several weeks.

Many bulls do not want to sell when their stop is so far above. Others will want to reduce risk by taking partial profits. Hence, there might be a lack of sellers around this price. As a result, a rally is likely soon. The 1st targets are the recent lower highs of November 15 and 17.

Written By: Al Brooks