The EURUSD currency pair reversed up from a new low in a yearlong bear channel. Traders expect a rally for at least a couple weeks, writes Al Brooks.
The EURUSD weekly chart formed a bull reversal bar last week. It is therefore a buy signal bar for next week. The odds are that the EURUSD rally will continue for two to three weeks.
The EURUSD daily chart broke below the April 26 low and reversed up sharply on Thursday. Although that was a new 52 week low, every breakout to a new low over the past year reversed up. That is what happens in bear channels. The bulls buy below prior lows and bears sell rallies. Both take quick profits.
All legs up and down over the past year have lasted two to three weeks. The bulls are hoping that this is the start of a three-week rally. Thursday was a big outside up day that closed on its high. In addition, it closed above Wednesday’s high. Also, Friday was a bull bar and therefore indicates that the bulls were continuing to buy. This is probably the start of a leg up.
The bears theoretically will exit above the May 1-May 13 double top at 1.1265. Since channels and trading ranges typically disappoint trend traders, if a rally has begun, it will probably go above that double top.
Bear channel is a bull flag
When will the bear trend end? A bear trend needs lower highs and lows. As long as it continues to form major lower highs, it is still intact.
The most recent major lower high is the March 20 high of 1.1448. If the rally breaks above that high, traders will conclude that the bear trend is over.
When a bear trend end, a trading range usually begins. Less often, the rally will continue far up and form a bull trend.
Traders should think of a bear channel as a bull flag. This is because there is a 75% chance of a break above the bear channel.
The bears only have a 25% chance of a successful break below the yearlong bear channel and an acceleration down. If there is a strong break below, it will probably reverse up within a few bars and begin a swing up.
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