The forex market on the daily chart has been reversing up from a 6-week selloff. The rally today broke above the bear channel, and back above the Jan. 18 low. Traders expect a couple legs sideways to up after a 6-week sell climax.
If today closes near its high, traders will expect a couple legs up to the Jan. 22 lower high. A strong break above that high will end the bear channel. The daily chart will be back to neutral, and in the middle of its 3-month trading range.
But if today closes below the bear trend line, traders will expect the 2nd leg to be more sideways than up. Furthermore, they will conclude that the bear trend is probably still intact.
A market often breaks above a channel, but then turns down and makes another new low. This results in a broader channel, which means that the bear trend is still underway. Unless the EUR/USD breaks above the Jan. 22 high, the odds still favor lower prices.
Overnight EUR/USD Forex trading
The 5-minute chart of the EUR/USD Forex market rallied overnight and broke above the bear trend line on the daily chart. However, it pulled back almost 30 pips over the past few hours, to just above that trend line, which is around 1.2080. That is enough to make bears expect a trading range. Day traders will therefore probably start to sell rallies in addition to buying pullbacks.
The key price is the bear trend line on the daily chart. It is the top of the 6-week bear channel. If the bears can get today to close below the line, and below the midpoint of today’s range, traders will view the 3-day rally as a likely bear flag within a bear channel. While there will probably be a 2nd leg up after the sell climax on the daily chart, it might be more sideways than up.
But if the bulls can get today to close on the high of the day and far above the bear trend line, the odds of a test of the Jan. 22 lower high will be more than 50%. Traders will expect the 2nd leg up to be more up than sideways.
Therefore, the daily bear trend line could be a magnet all day. Sometimes a chart will oscillate around a magnet and then decide in the final hour whether to close above or below it. With the trading range trading of the past hour, that process might be beginning.