The euro broke below a five-month trading range, but needs follow-through selling to signal a larger bear move, writes Al Brooks.
The EURUSD daily chart broke strongly below its five-month trading range last week. If there is no follow-through selling this week, the breakout will end up like all of the others over the past year. Traders will begin to look for a three-week rally back into the five-month range.
After Wednesday’s FOMC announcement, the EURUSD daily chart broke strongly below the five-month trading range (see chart). The bears wanted strong follow-through selling on Thursday. Instead, Thursday was a bull doji reversal day and Friday was a small bull trend day. That is a sign that the bear trend is not nearly as strong as it could have been had Thursday been a big bear bar closing on its low.
It is a reminder that the yearlong pattern of reversals up from new lows might still be intact. Traders will now look for a reversal back up over the next week. If the bulls can rally back above Wednesday’s high, traders will begin to believe that the bear breakout was just another leg in the yearlong bear channel.
The bears need big bear bars within the next week. They want a measured move down from the June/July head and shoulders top bear flag. That target is 1.0950. Furthermore, they are hoping that Wednesday’s break below the five-month trading range will result in a measured move down to 1.0802.
But unless they get their strong follow-through selling over the next week, the bears will begin to take profits and the bulls will buy, expecting a tw0- to three-week, 200 to 300 pip bull leg in the bear channel. A rally from here would create an expanding triangle bottom with the April 26 and May 23 lows. In addition, there is a month-long wedge bottom. The first target would be the July 11/July 19 double top, which was the start of the wedge.
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