The euro currency is set to rally, but needs to test support first, writes Al Brooks.
The EURUSD currency pair will probably rally for a few weeks soon, but it might have to test the October low first.
The EURUSD currency pair reversed up from a nested wedge bottom in October on its weekly chart (see below). The three-bar rally in October was the strongest on the weekly chart in almost two years. A strong rally usually has a second leg up, and so does a wedge bottom. Consequently, traders should expect a second leg sideways to up. The minimum goal is a test of the October high and the 13-month bear trend line. Both are around 1.12.
But from what level will the second leg up begin? No one knows. The bulls are hoping that this week will reverse up from the micro double bottom over the past three weeks. Last week was a doji bar and that is not a strong buy signal bar for next week. They will need a strong bull bar next week for a reliable entry bar. Otherwise, the EURUSD might drift down to the October low over the next few weeks.
The bear channel is intact
The bears want a strong break below the October low. That would be a sign that the two-year bear channel is still intact. A bear channel is a bear trend. The bears have enjoyed their bear trend for 22 months.
They know that every new low for two years quickly reversed up for several weeks. They expect that to happen again. That will not upset them as long as the chart continues to form lower highs and lows. They will then continue to sell two- to three-week rallies. Expect a 200-pip profit on the fall to a new low.
There are magnets not too far below at around 1.08. Therefore, the bear trend might not end until they are tested. The double tops in September 2018 and again in June 2019 have measured move projections down to just above 1.08. Also, the gap above the April 21, 2017 high is a magnet and it is around that same 1.08 level.
If there is a strong break above the June lower high just above 1.14, traders will reevaluate what is going on. That rally would increase the chance that the bear trend had ended. The EURUSD would then either be in a trading range or a bull trend.
How important is a new low?
Does it matter if there is a new low? Not really. Both the bulls and bears have been buying around the prior low for two years. The bulls buy for a 100- to 200-pip bounce and the bears take profits from their most recent sell from 200- to 300-pips higher.
Traders expect a second leg sideways to up after the October rally. If it comes from a higher low, the reversal up will be a higher low major trend reversal. It will probably only lead to a two- to three-week, 200-pip bounce, like every other reversal up from a new low.
If the rally comes from below the October low, traders will not see it as a second leg up. However, they would think of it as just another rally from a new low in the two-year bear channel. They will trade the rally the same whether it comes from a lower or higher low.
New Year Reversal?
Currencies sometimes have trend reversals around the early January. Since this selloff has lasted an unusually long time, traders expect a reversal up soon.
The EURUSD is entering a time window when reversals tend to occur. Traders should therefore watch the EURUSD more carefully into January to see if there is a good buy signal bar on the daily, weekly or monthly charts. A reversal up would have a greater chance of success if there was a strong buy signal bar on the weekly or monthly chart.
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