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Stay calm, rupee headed for consolidation: Charts

Prashanth Vishwanathan | Bloomberg | Getty Images

The collapse of the Indian rupee is rapid and the danger lies in the potential to act as trigger for a new regional currency crisis in emerging markets.

From a chartist perspective, the collapse is so rapid that it may be difficult to apply accurate technical analysis. The reasons are that patterns applied to long-term currency charts are less robust because the foreign exchange markets, more than other asset classes, is subject to direct political interference, be it central bank policy, QE3 or tapering. This means that longer term application of technical analysis patterns must be applied with caution.

(Read more: Why the rupee may not be headed to 70)

Having said that, here are the some broad implications of how the recent rupee moves suggest about direction going forward.

The broad behavior of the chart patterns provides some guidelines for the development of the market. The Indian rupee weekly chart has two chart patterns. The first is an upward sloping triangle that has developed over a long period, shown in pattern A. The base, or start of the pattern at 48.50 develops over several months. The resistance level, located near 55.90, forming the upper edge of the triangle is also not well defined. It's not a perfect pattern but it provides the first method of analysis. The base of the triangle is measured and projected upwards to give a pattern breakout target of 63.20. This target has been achieved.

(Read more: Are the stars not aligned for the rupee?)

The second pattern on the weekly chart is the recent bullish flag pattern. This is shown as pattern B. This developed over three weeks after the fast breakout above resistance near 55.90. The bullish flag pattern is used by measuring the height of the flagpole at the start of the pattern. This value is then projected upwards to give a flag breakout pattern target. This is located near 66.30. This pattern target has not been achieved and this suggests that the rupee trend has further to move.

The combination of these two suggests the way this collapse in the rupee may develop next. Traders will look for a continued move towards the flag pattern target of 63.20 followed by a consolidation or retracement. This consolidation may use the 55.90 as a support level and 63.209 as a resistance level. This may develop into a broad band of consolidation as the central bank attempts to stabilize the rupee.

(Read more: Calls get louder for India to free up currency)

Technical analysis can be applied on a daily chart to help set price targets with more accuracy but it does not help investors understand the wider strategic environment. Technical analysis on the weekly chart provides a guide and framework for how future activity may develop with the rupee. More importantly, it shows how these currency pressures and patterns of behavior may also develop in other regional currencies.