EUR/USD: Head And Shoulders Top, But Trading Range Likely
The 60-minute chart of the EUR/USD Forex market is turning down from a Head and Shoulders Top (HST). Because most reversals fail, the pullback back up has been strong, and the bears reached their minimum goal of 2 legs down from the high, the odds are that the EUR/USD will form a trading range. Whenever there is a reasonable argument for both the bulls and bears, as there is here, the odds are that the market is balanced and it will go sideways.
While the EUR/USD has nested head and shoulders tops, a head and shoulders top is a trading range. Bulls see it as a triangle or some other type of bull flag. Only 40% of major bear reversals lead to bear trends. Because tops are usually trading ranges, it is more likely that the market continues sideways. It would therefore disappoint both the bulls and the bears. However, Friday’s selloff triggered the short. The bears need follow-through today. Yet, the odds still are against the conversion of the trading range into a bear trend on the 240 minute chart.
Stock market selloff
Friday’s big selloff in the US stock market did not have a significant effect on the EUR/USD on Friday. If the stock market continues to selloff, it will affect all financial markets. Yet, it is impossible to know if the result will be a bull or bear trend. Traders should therefore simply trade what is in front of them.
Because the stock market selloff is probably just a bear leg in a bull flag on the weekly chart, Forex traders do not yet see it as significant.
EUR/USD overnight Forex session
The EUR/USD overnight traded mostly sideways and within Friday’s range. This is what most commonly happens as a reversal begins to form. Most reversals end up as continuation patterns, not opposite trends.
While there was a 50 pip selloff overnight, the EUR/USD has been in a 20 pip range since. The selloff will probably end up as a sell vacuum test of the bottom of the 4 day range. Until there is a strong breakout of the range, Forex day traders will scalp, as they do on most days.