The euro moved close to the bottom of its two-year bear channel and could be signaling further weakness, reports Al Brooks.
The EURUSD currency pair has sold off for two weeks (see weekly chart below). I have mentioned the gap above the April 17, 2017 high many times over the past six months. I said that the EURUSD might have to test the gap before the bulls could regain control.
Thursday’s low was one pip above the April 17 high. The bulls want a successful test, which means a reversal up from the gap.
However, the bears want the test to fail. Instead, they want the EURUSD to continue down to the next support, which is the 2017 low. That was the bottom of a yearlong rally.
If the bulls can get a reversal up from above that low, they will see the two-year selloff as a bull flag on the monthly chart (not shown). However, if the bears get a break below that low, the bull case will be over. The bulls need higher lows. A break below that low would be a lower low. The bulls would then have to start over in their attempt to get a bull trend reversal.
Can the selloff continue down to par?
Not only do the bears want a break below the 2017 low, they want the selloff to continue down to par (1.00). The momentum down over the past few weeks has been exceptionally strong. That increases the chances for the bears. But the support at the gap and the 2017 low are also strong. Until the bears get their breakout, it is still more likely that the bulls will get a reversal up from above the 2017 low.
Parabolic wedge sell climax
The EURUSD has been in a free-fall on the daily chart for several weeks (see below). The stop for the bears is now far above. Many bears will want to reduce their risk.
The easiest way is to buy back some of their shorts. When the sell climax is extreme like it is on the daily chart, the short covering typically has at least a couple legs sideways to up. Also, it usually lasts 10 bars or more. Therefore, traders are looking for about a 100- to 200-pip rally for a couple weeks. It probably began Friday.
Wednesday was the third pause in the selling in seven days. Three legs down in a tight bear channel is a parabolic wedge sell climax. The bulls are hoping that Friday’s bull trend bar was the start of the short covering rally. The EURUSD got to within one pip of closing the gap and there is a parabolic wedge selloff down to that support. There was a strong rally on Friday. Many bears are beginning to take profits and bulls are starting to buy.
If the bulls can create one or two more big bull bars on the daily chart, traders will conclude that the EURUSD has begun at least a couple weeks of short covering. But if the bears get a couple closes below this week’s low, especially far below, traders will expect the selloff to continue down to the 2017 low.
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