While the euro is testing the top of its bear channel, the bear channel persists, writes Al Brooks.
The EURUSD currency pair formed a High 1 bull flag buy signal on its weekly chart. It will probably trade up this week. Furthermore, there is a 50% chance that it will test the June high within a couple months.
The euro rallied for three weeks before pulling back in October. This past week it formed a bull inside bar. It is therefore a High 1 bull flag buy signal bar for this week.
After the strong rally, the bulls expect at least a small second leg up. An obvious target is the bear trend line that began in September 2018. It is currently at 1.1214, which is only 40 pips above this week’s high.
A more important target is the June major lower high of 1.1413. If the bulls can get a couple consecutive closes above that high, traders will conclude that the bear trend has converted into a trading range and possibly a bull trend.
Minor reversal up
The euro has not had two consecutive strong bull bars on its monthly chart since the selloff began in February 2018. However, the selloff is still holding above the 2017 low. Since that was the bottom of a strong yearlong rally, the 21-month selloff is still probably a bull flag (see chart).
But the bear channel has been tight. When that is the case, any reversal attempt will likely be minor. That means that it could last a few bars (months), but the EURUSD would probably then test back down.
The bulls typically need at least a small double bottom before they can convert a bear trend into a bull trend (a major trend reversal). Until there is a double bottom, traders will assume that the rally is minor. They will see it as either a bull leg in the bear trend or in a developing trading range.
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