EUR/USD Weak Reversal Up
Al Brooks | Jul 26, 2016 09:18AM ET
This 60-minute EUR/USD chart shows the 2nd leg down from the July 5 high. That high was the top of the bear rally after the June 24 sell climax. The chart shows a Broad Bear Channel, which is a bull flag. The 2 day rally was a Wedge Bull Channel within the bigger bear channel. A bull channel is a bear flag. The EUR/USD turned down 4 hours ago from the top of the bigger bear channel and is now testing the bottom of the smaller bull channel.
The EUR/USD daily chart yesterday formed a bull reversal after selling off for 2 legs over the past month. Because the bear channel is tight and it is within a month long trading range, the odds of a strong bull breakout are small. Yet, most trading range breakouts fail. As a result of the EUR/USD selling off to the bottom of the trading range, the odds of a bear breakout are also small.
h3 Wednesday’s FOMC report/h3The Fed announcement on Wednesday will probably result in a big move. It can be up or down, or go one way and reverse. It does not matter whether they raise rates or change the wording. No one knows how much money is positioned to buy or sell. Like I said about the Emini, day traders should simply wait to see. If the EUR/USD rallies, buy. If it sells off, sell. Price is truth.
European Forex session
The EUR/USD has traded down in a tight bear channel for the past 4 hours. Yet, it is only 45 pips below the high. This bear reversal on the 5-minute chart follows a 3-day broad bull channel. A bull channel is a bear flag. The selloff is a breakout below the bear flag. However, it has yet to fall below a higher low in the 3-day bull channel. If it does, the rally would then be over and the chart will have evolved into a trading range. This is what usually happens after a channel up or down.
The overnight selloff was in a tight bear channel, which is a breakout on a higher time frame. Hence, the 1st reversal up will be minor. The best the bulls can realistically expect over the next couple of hours is a trading range.
h3 60-minute bear channel, but within a trading range/h3The chart is not much better for the bears. The selloff, while in a tight bear channel, has a lot of prominent tails and small overlapping bars. This is more common if the selloff is a bear leg in a trading range. Also, it is now hesitating at a higher low in the 3-day rally. This is trading range price action. While this bear leg can fall further, it is likely soon to reverse up. As a result, the 5-minute chart will then evolve into a trading range.
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Until the range grows to 20 or more bars, the odds still favor at least a small breakout. However, because all time frames are in trading ranges and there is a catalyst tomorrow. the odds favor a lot of trading range price action again today.
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