The huge euro rally may mean the end of its two-year bear trend, writes Al Brooks
The EURUSD currency pair has rallied strongly for two weeks. Traders believe that the two-year bear trend has finally ended. The rally is either the start of a bull trend or a bull leg in what will become a trading range.
The EURUSD weekly chart reversed up violently over the past two weeks after testing the gap from April 2017. It turned up from just 1 pip above the bottom of the gap (see chart).
The past two weeks were surprisingly big bull bars. A Surprise Bull Breakout typically has at least a small second leg up. Consequently, traders should expect the bulls to buy the first one- to three-bar pullback on the weekly chart.
The rally broke far above the 18-month bear trend line. That is the top of the bear channel and it is resistance. It also broke above the high of a seven-month trading range. This is therefore a logical area where the bears might begin some profit-taking.
But this rally is surprisingly strong. Because the breakout was far above, it increases the chance of at least a small second leg up. Traders will buy the first one- to three-bar (week) pullback.
Likely end of two-year bear trend
The reversal up from the gap to above the top of the bull channel and trading range is an unusually strong sign that the bears are losing control. It is strong enough to make it likely that the two-year bear trend ended. When a bear trend ends, either a bull trend or trading range begins.
The two-year selloff retraced most but not all of the 2017 rally. The bear channel is therefore is a bull flag. This week is starting to break above the bull flag.
If there are several bigger weeks like the past two, traders will conclude that the 2017 bull trend is resuming. More often, the first rally above a bear channel is the start of a trading range and not a bull trend. The EURUSD is now in search of the top of the trading range.
It is often at the start of the bear channel. That is the top of the first pullback from the strong reversal down from the top of the bull trend (February 2018). That first pullback’s high is the September 2018 high of 1.1816. The rally of the past two weeks is already halfway there.
Bear channel usually evolves into a trading range
A rally after a bear channel usually ends up as a bull leg in a trading range. A leg in a trading range typically stalls after a few bars. After pulling back for a few bars, it begins another leg up. Traders should expect pauses at the lower highs in the two-year bear channel. This is unlike the start of a bull trend where the pullbacks are brief, and the rally can last five to 10 bars before there is more than a one-bar pullback.
The bear channel is now probably evolving into a trading range. The current rally is therefore probably a bull leg in what will become a trading range.
The top of the range is typically around the start of the bear channel. Consequently, the EURUSD might go sideways for the next couple of years between the February 2020 low of 1.0778 and the September 2018 high of 1.1816 (approximately 1.08 to 1.18).
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