The daily chart has been in a bear channel for a year. Every rally has failed after 2 – 3 weeks and it led to a 2 – 3 week selloff and another new low. However, the bulls bought every new low and created another bear rally. There is no sign that this pattern is about to change.
What is unclear at the moment is whether the most recent bear rally ended with the May 13 high and last week’s rally is a pullback in a resumption of the bear trend. If so, the bears will get a break to a new low over the next week.
The alternative is that the May 23 new low is the start of another 2 – 3 week rally. If that is the case, the 3 day selloff is a pullback from last week’s reversal up. The bulls will then look for another couple week’s of higher prices. That would probably lead to a break above the May 13 high, but not the March 20 major lower high.
Trading Range Means Breakout Mode
When a market is in a trading range, it is telling traders that the bull and bear cases are about equally likely. The probabilities shift slightly in favor or one side or the other every few days. At the moment, there is a slightly higher probability that the 3-day selloff will form a higher low instead of a new low. The bulls need a bull bar today or tomorrow to show that they are resuming control.
However, the bears need to continue to form more bear bars. Additionally, they need a break below the May low to show that another swing down is underway.
The chart is still in a trading range. Day traders expect legs up and down to reverse every few days. In addition, the expect most days to be small.
Overnight EUR/USD Trading
The EUR/USD 5-minute chart has been in a 30-pip range overnight. In addition, it has been in a 15-pip range for the past 5 hours. At the moment, day traders are waiting for the range to expand before resuming trading.
Three days down is about as long as a pullback should last. Therefore, if last week’s low is the start of a swing up, the bulls need a bull day today or tomorrow. They will buy selloffs and try to get today to close above the open. That would create a credible buy signal bar on the daily chart.
The bears do not need a big bear bar. All they need is the absence of a good buy signal bar. They know that as long as they are able to continue to create bear bars on the daily chart, the odds will begin to shift in favor of another new 52-week low. They will sell rallies to above today’s open and try to get the day to close below the open.