Monday, January 30, 2023

EUR/USD: 5-Day Pullback, But A Rally May Soon Come


Wednesday was another small day for , and it turned up from the bottom of a 10-day tight trading range. It traded slightly below Tuesday’s low and then slightly above Tuesday’s high. It was therefore an outside up day. However, it closed below Tuesday’s high, which means it is not a strong buy signal bar for today.

Today has had the pair dip below yesterday’s low, going slightly above yesterday’s high. It is therefore a second consecutive outside day (OO pattern). An OO is a breakout mode pattern, which increases the chance of buyers above and sellers below tomorrow. We now have a 5-day pullback from the minor reversal up to Oct. 19, which was a test of the Aug. 19 breakout point. The 5-day selloff has been weak. It looks more like a leg in a trading range than a resumption of the bear trend.

Bulls want a reversal up from a higher low major trend reversal. If tomorrow breaks strongly above today’s high, that would increase the chance of higher prices next week. Bears want the reversal down from last week’s high to accelerate and break below the Mar. 9, 2020 high, which was the breakout point for the 2020 summer rally. If tomorrow breaks below today’s low, that would increase the chance of a test of the October low or lower.

Traders are deciding if this selloff is a resumption of the trend or a pullback from what they hope is the start of a bull trend. Because that is an important price and the EURUSD has been in a trading range for 7 years, the odds still slightly favor a dip below that high before there is a reversal up to test the Sept. 3 high.

Traders should expect a rally lasting at least several weeks to start soon. They are deciding if it has already begun or if there will be one more leg down first. Tight trading ranges resist change. Consequently, it is more likely that today will be another average day. The pair should trade above yesterday’s high since yesterday formed a reasonable buy signal. However, the odds are against today being a big bull trend day because the EUR/USD is in a tight range.

At some point soon, there will be either a breakout below the range and a test of the Mar. 9, 2020 high, or a strong break above the October high and then a rally for several weeks. However, until there is a breakout, it is more likely for the tight trading range to continue.

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