The daily chart of the market fell to within 1 pip of closing a gap from 2017 last week. It reversed up violently and is back in the 4-month trading range from late last year. Since traders thought that this area was a fair price for a long time, they will probably again think it is fair. Traders should expect the rally to stall this week and begin to go sideways.
The rally is a Bull Surprise. A surprise means a low probability event. Consequently, many traders are positioned incorrectly. The bulls who missed the rally are eager to buy a dip. Also, many bears failed to exit near the low. They want a pullback so that they can buy back their shorts with a smaller loss.
With lots of bulls and bears looking to buy a pullback, the 1st reversal down will be minor. This is true even if it lasts a couple weeks, retraces more than half of the rally, and again dips below the October low.
Monthly Buy Signal
The 5-minute chart of the EUR/USD Forex market rallies strongly last night to above last month’s high. On the monthly chart, February closed above its midpoint and therefore is a buy signal bar. The overnight rally triggerd the monthly buy signal.Since February had a bear body and its high was in the middle of a 7-month tight trading range, it is a weak buy signal bar. Therefore, there will probably be sellers somewhere above its high. It is more likely that the EUR/USD will go sideways for the next month than up above the January high. However, if it breaks strongly above the January high, traders will conclude that the 2-year bear trend has finally ended.
Overnight Forex Trading
The EUR/USD 5-minute chart has been rallying in a tight bull channel overnight. A big bull trend makes a bear trend unlikely today.
The rally went above last month’s high and above the sell climax high on the daily chart. Also, it has been extreme and will soon attract profit takers.
There might not be much incentive for today’s huge bull today to continue much higher today. Therefore, traders will probably begin to take some profits. Once they do, the strong bull trend on the 5 minute chart will evolve into a trading range.
When it does, bear day traders will begin to scalp. They want to see at least one 30 pip pullback before shorting. And even when they do short, they will look for only 10 – 20 pip scalps.
At the moment, day traders are only buying, mostly for swing trades. As the momentum slows, they will begin to switch to scalping. Even once the EUR/USD enters a trading range today, it will still probably be easier to make money buying pullbacks than selling rallies.