Last time we looked at the euro/dollar chart we set a potential upside target of $1.40 – if the trend remained intact. The euro/dollar moved below the trend line and this signaled a change in the analysis. The Cyprus impact is a small blip on the weekly chart.
Chart analysis is not about prediction. The objective is to identify the range of probable outcomes. Chart analysis is also about identifying the point where the balance of probability changes because this requires an adjustment of trading strategy.
Whilst the price remains above the trend line there is a high probability of action developing as discussed with an upside target near $1.40. A drop below the trend line changes the balance of probabilities. In this situation we need to look again at the structure of the market to determine the potential downside targets.
(Read More: How Tiny Cyprus Could Still Have Big Market Impact)
The trending behavior in the euro/dollar move between the support and resistance levels. The trends are interrupted by consolidation behavior at the support and resistance levels. This combination of behavior is best seen on the weekly chart.
Starting May 2011 the euro/dollar moved in a downward sloping trading channel. This is defined by the trend lines A and B. In September 2012 the euro/ dollar staged the first breakout above the upper edge of the channel, trend line A. This line was used as a support level with a rebound in November 2012 from $1.27. This rebound point provided the anchor point for the new uptrend line C.
The trend movement has been constrained by the strong support and resistance area near $1.29. The market consolidated around this level before moving to resistance near $1.34. The move below trend line C near $1.32 has an initial downside target near $1.29. This suggests a high probability of a retreat and retest consolidation of this level. This is a strong level, so a test and retest is not a signal to go short. Consolidation here is a signal to cover shorts to protect profits.
The upside target for the euro/dollar in a rebound from $1.29 is the previous resistance level near $1.34.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
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