I mentioned before the open yesterday that the Forex markets were climactic over the weekend and that they were likely to reverse for at least a day or two. The reversals on the 240 minute candlestick charts have continued overnight. The biggest climaxes were the buy climaxes in the EUR/USD and EUR/CAD and the sell climax in the USD/JPY. Although V-tops and bottoms theoretically can happen, most are usually some other pattern and most require at least a little trading-range price action before a reversal can take place. This means that most abrupt climaxes (big up and then big down, or big down and then big up) generate confusion and not reversals. Confusion is a hallmark of a trading range, and that is what is likely to form after a climax. As the trading range develops, both bulls and bears see patterns in their direction. The market is then in breakout mode. After 20 or 30 bars, the trend is so far in the past that the probability that it will resume falls to about the same as the probability of a reversal.
For example, the USD/JPY 240-minute and daily charts had a sell climax. However, the market reversed up sharply from the bottom of the year long trading range and is now back in the middle of the February to April tight trading range. What is it likely to do? It will probably do what it did here earlier and enter a trading range again. Within the range, bulls will see a major trend reversal. Bears will see bear flags. As bars get added to the range, the probability for a 2nd leg down drops to about the same as the probability of a reversal.
The same is true of the buy climax on the daily chart of the EUR/USD. Bears see it as a failed breakout above the year long trading range. Bulls see yesterday’s selloff as a pullback from that breakout, and they expect at least one more leg up. The price action is confusing, and the result usually is that the market has to go sideways since the bears are now just about as strong as the bulls. Traders know that because otherwise the strong reversal down would not have happened.
The EUR/CAD had an extremely strong bull breakout and the reversal down was less strong. Also, the 3 day rally was a bull breakout above a bull channel, which usually fails within about 5 bars. However, when the breakout is as big as this breakout was, the odds are that the rally will continue for about a measured move up. The rally came very close to that target, which means that if there is a 2nd leg up, it might be small and create a small double top.
This rally is also so far only a test of the 2014 lower high. The bears want a double top. The bulls want a breakout. The rally was strong enough so that the 1st reversal down will probably fail and be followed by a test up. The reversal down was strong enough to make a trading range likely for a few weeks.
The 5-minute chart of the EUR/CAD was in a broad bear channel since the buy climax yesterday. With a trading range likely, this bear channel will probably be followed by a bull channel over the next few days. The trading range will probably be at least 300 pips tall, which means that Forex swing traders will have opportunities up and down. Those who trade Forex markets for a living will simply wait for reversal patterns or for strong breakouts and then place their swing trades.
The 5-minute chart of the EUR/USD has also been in a broad bear channel, and online daytraders will take trades in both directions. The trading range so far is only about 100 pips tall, which means that day traders will scalp more and swing trade less.
The 5-minute chart of the USD/JPY has been in a bull channel for two days. Traders learning how to trade the markets can take long swing trades, or look for a top today or tomorrow on the 5-minute chart for a swing trade down. The rally is in its 3rd leg on the 5- and 60-minute charts, which is a wedge bear flag. The odds favor a test down soon for a day or two.
All financial markets had climaxes and will probably be sideways for many days and possibly weeks.