The EURUSD weekly chart broke below the May low last week reaffirming the bear market, reports Al Brooks.
The five-week trading range in the EURUSD currency pair ended and the bear trend resumed following last week’s’ breach of the May low. However, every leg up and down over the past year reversed, and that is likely this time as well.
In June, the EURUSD weekly chart had its strongest bear rally since September. However, last week it broke to a new low, resuming the yearlong bear channel (see chart). Every breakout to a new low over the past year reversed up within about a week. Traders should therefore expect the same this time.
The legs up and down over the past year have all lasted at least a couple weeks. Furthermore, they were around 200 to 300 pips tall. Consequently, traders should expect a reversal up within a couple weeks. They might be waiting for Wednesday’s FOMC announcement.
Bear channels do not last forever
While reversals have been reliable for the past year, nothing lasts forever. Traders know that there will be a bull or bear breakout at some point. For the past year, I have consistently said that until there is a strong breakout, traders should continue to bet on reversals. Nothing has changed.
The bears are hoping for a successful breakout below the bear channel. That happens 25% of the time. But if the bears begin to get two or more big bear bars closing below last week’s low, traders will conclude that there will be a swing down.
There are two other possibilities. If there is going to be a breakout of the channel, there is a 75% chance of a bull breakout above a bear channel. Traders should think of a bear channel as a bull flag.
The final possibility is that a channel begins to go sideways. This one has been sideways for five months.
Once the bears stop getting lower lows, the pattern is a trading range. At that point, the probabilities shift. Instead of the odds favoring a bull breakout, the chance of a bear breakout increases to the same as for a bull breakout.
A trading range is a breakout-mode pattern. There is always both a buy and a sell setup within a trading range. The bulls and bears have an equal chance of a successful breakout.
Channels often spend a lot of time in trading ranges. But as long as a bear channel keeps forming new lows, the bear trend is still in effect. That is currently the case after this week’s new low.
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