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EUR/USD: Expect Higher Low

EUR/USD: Expect Higher Low

I have been saying over the past week that the EUR/USD daily chart was transitioning into a trading range that would probably last at least a couple of weeks. I wrote that a trading range has legs up and down, and that yesterday’s rally achieved its goal of testing the top of the February 26 sell climax. The rally was strong enough so that the current selloff will probably be bought and form a higher low, and then a test back up. The bulls will then see this selloff as a pullback from last week’s breakout above the 60- and 240-minute bear channel. They then will buy, expecting at least one more leg up. If they are successful at halting the bears over the next few days, the reversal up would form a higher low major trend reversal (head and shoulders bottom). These bottoms are always in trading ranges, and therefore have only a 40% chance of a bull breakout and swing up. Many traders buy the reversal up because the reward is much bigger than the risk and it more than offsets the 40% chance of a big profit. Other traders prefer to wait to see the bull breakout of the selloff’s bear channel and then buy. Their stop is then further, but their probability of profit is higher. Both approaches are good.

The bears see the selloff as a double top bear flag with the February 25 high. They expect a breakout below the March 2 low, which is the neck line of the double top, and then a measured move down of about 300 pips. Since the neck line is only 100 pips above the support of the January 5, 3-month trading range low, the odds are that the bears will not get their 300 pip selloff without at least first seeing a 200 pip bounce from that support.

Over the past hour, the 5-minute chart has been in a bear breakout below a wedge bottom. There is support around the 1.0900 March 4 higher low, 50 pips below. Since the 2 day selloff has been in a tight bear channel on the 5-minute chart, the best the bulls can probably hope to see today is a trading range. A bear trend usually first have to evolve into trading range before it can reverse into a bull trend.

There is still 50 pips room down to that March 4 low, and the EUR/USD might have to test that magnet before the bears take profits and the bulls begin to buy. Although the 2-day selloff has been in a reasonably tight channel, it is near the bottom of the 4-day trading range, and the 5-minute chart might begin to enter a trading range today.

The bear channel is tight, but it has not fallen many pips. It is probably a bear leg in what will become a trading range, and the 5-minute chart will probably begin to convert into a trading range today.

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