Sometimes it pays to wait. This is especially true when faced with weekend gaps that disrupt market equilibrium, such as those triggered by Sunday’s first round of voting in France.
The EURUSD gapped up by nearly 180 pips. And contrary to popular belief, gaps such as this don’t always close, at least not right away. Look no further than the Brexit-inspired gap on the GBPUSD which remains unfilled almost one year later.
Going back to my first comment above about waiting, I haven’t done much this week aside from adding to my AUDNZD long position. For the pairs that gapped significantly, I was waiting for a few days to pass to see if any patterns would develop to suggest where they might go next.
One such pattern has materialized on the EURUSD. Ascending and descending channels are inherently bearish and bullish respectively, but only when they form against the trend.
That last part is key because without it the directional implications break down completely. For instance, an ascending channel that forms after a run up is an exhaustion pattern and therefore has bearish implications. If that same channel were descending, it would have bullish implications.
A look at the EURUSD 1-hour chart shows the former. We have what appears to be an ascending channel following Monday’s 180 pip gap up. The formation comes after 48 hours of gains and could signal a change in direction.
The event calendar is relatively light today but tomorrow is a different story. Mario Draghi takes center stage at 8:30 am EST shortly after the ECB rate decision at 7:45 am EST. These events are known to produce excessive volatility so do keep this in mind if you’re considering an entry here.
Below channel support, the next key level comes in at 1.0870 followed by 1.0825. A move higher from current levels would likely encounter selling pressure at 1.0885/90.
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