The EURUSD reversed up from a nested wedge bottom on Oct. 1, writes Al Brooks.
The EURUSD currency pair reversed down on profit-taking on Friday on its weekly chart. The bulls achieved their goal of two legs up to the bear trend line after the Oct. 1 nested wedge bottom. It might pull back a little next week, but the five-month trading range is likely to continue.
The three week rally in October was the strongest rally in two years on the weekly chart (see below). Consequently, the bulls were likely to get at least a small second leg sideways to up. The rally over the past three weeks fulfilled that minimum expectation.
The next important target for the bulls is the Oct. 21 high. If the bulls can get two closes above it, they will then try to break above the June 25 high. That is a major lower high. When a bear rally breaks above a major lower high, traders conclude that the bear trend has evolved into a trading range or a bull trend.
The bears know the implications. They therefore will try hard to prevent consecutive closes above resistance. This is especially true of major resistance.
Profit-taking at resistance
For more than a month, I have been saying that the rally would test the 14-month bear trend line and probably the October high. It broke above both on Friday. I also said that it would test the 1.12 Big Round Number. Friday’s high was exactly 1.12.
The EURUSD reversed down on the daily chart (not shown) on Friday, indicating that the bulls took profits. The bulls were not buying at the high, betting on a successful breakout. There will probably be some follow-through selling next week.
In addition, the bears sold, betting that the bulls would sell out of longs. Friday is now a sell signal bar on the daily chart. However, the chart is still in a five-month trading range. If there is a selloff, it will probably last two to three weeks and test the November low.
Even if the bears break below the October low, the bulls will buy a reversal up. That has been a profitable strategy for two years and the odds are it would work again.
Long-term trading range
While the bulls have not done enough to create a bull trend, the weekly bear channel has never been strong. The bulls continue to buy reversals up from new lows, like they have been doing over the past year.
But what about the upside potential? The two-month rally has not been especially strong. The daily chart has been in a trading range for five months. Traders expect a continuation of the five-month trading range rather than a strong breakout up or down. They will continue to look for reversals every two to three weeks.
This is true whether the bear channel continues or if the EURUSD is in the early stages of a bull trend. The bulls need a strong, relentless breakout before they will buy high and hold for months. That is not likely after the first breakout above a tight bear channel.
The EURUSD will probably be in a trading range for at least several more months. It is now in search of the top of the range.
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