The EUR/USD is oversold on the daily and 60-minute chart, and near the bottom of the December/January trading range. The odds are that it will bounce soon. There is still room (70 pips) below yesterday’s low to the measured move target based on the gap between the February 19 low and the February 26 high. The EUR/USD could easily fall to the target and even below the trading range low.
Because it is so oversold, it is more likely that it will trade sideways to up over the next several days. Whenever there is a sell climax relatively late in a bear leg, the target for the bulls is the top of the final bear breakout. This is the February 26 high or around 1.1070, which is about 250 pips above the current price. Since the EUR/USD is in a trading range and the selloff has been strong, if it is going to reach the target before breaking below the bottom of the range (the January 5 low, around 1.0700), the rally will probably be weak. That means that it will have pullbacks after every 1 – 3 days up.
When a channel is tight, like the one on the daily chart over the past 3 weeks, the first reversal up is usually minor. A minor reversal up is a bull leg in what will become a trading range, rather than the start of a bull trend. This means that even if the rally continues for 10 bars (days), it will probably be followed by a test back down. A trading range is therefore likely over the next 2 – 3 weeks.
The rally that began yesterday had a 2nd leg up overnight. Neither leg was particularly big, which is consistent with the likelihood that any rally will be a leg within a trading range over the next few weeks. Has the move up to the 1.1070 top of the sell climax begun? It is too early to know. However, after a sell climax down to a support area, the odds of much more down are about 40%. The EUR/USD will probably be sideways to up for at least a week or two, and the rally will probably be weak, constantly looking like it is about to reverse back down. Bulls will buy pullbacks on the 60-minute chart and put their stop below the most recent higher low.
Day traders will generally buy pullbacks on the 5 minute chart and scalp part or all out at new highs for 10 – 20 pips. If the EUR/USD begins to go sideways, bear day traders will sell above prior highs, use wide stops, and scale in for 10 – 20 pip scalps. If there is a strong breakout up or down, day traders will enter on during the breakout for a swing or a scalp up. The bulls had a swing up yesterday morning.