USD/CAD Strong Overnight Breakout, But Getting Climactic
As I mention Tuesday, the EUR/USD 60 minute chart was oversold and was likely to rally for a couple of days. The rally continued overnight and is now getting close to a 50% pullback from the selloff of the past couple of weeks, which is around 1.2850. It is in the gap down area of September 21, and markets often go sideways once they are back to a gap area. A gap in not a traditional gap, like one sees on a stock chart. Instead, it is any space between support and resistance. It is a breakout. There was a gap between the September 18 low of 1.1268 breakout point and the pullback of September 21 to 1.1216. The EUR/USD might begin to go sideways here to fill in that gap.
Traders who trade Forex markets for a living see that the rally the two hour rally in Europe lacked consecutive big bull trend bars on the 5 minute chart. This increases the chances that the EUR/USD will soon go sideways. This is especially true because the 2 day rally is more likely a bull leg in a trading range on the 60 minute chart and not the start of a bull trend. Although there is no clear top yet to the rally, and bulls will still swing trade part of their position, the rally will probably evolve into a trading range today. Traders learning how to trade the markets have to be careful to not let their hope for a big bull trend not get in the way of their objectivity. They should be quick to transition to trading range trading today if the rally stalls, which it probably will.
The Canadian dollar was weak overnight. After a 2 month trading range on the daily chart, the bull trend is resuming. However, because that trading range came late in a bull trend, and the bull breakout of the past week is forming the 3rd push up from the May low, this might be the final rally before a bigger pullback, like the one in April. There is no top yet and the trend is strong on the 5 and 60 minute charts.
The 5 minute chart is getting climactic and the 60 minute chart is getting a parabolic bull breakout above a broad 60 minute bull channel. While this can last a long time, when a bull trend accelerates late in a trend, it is often a sign of panic short covering. Once the final weak bears buy back their shorts, there can be a correction that can last for a couple of days.
A bull trend usually does not reverse into a bear trend. The best the bears can reasonably hope to see over the next few days is a bear leg in a trading range. The bulls know this and that is why they are still buying, despite the ongoing buy climax. They are confident that the first reversal down will be bought. They will scale in when the reversal comes, confident of at least a 50% bounce and probably a test of the rally high. This will allow them to get out no worse than breakeven and probably with a profit, no matter when their final buy during the buy climax was.