The euro rose to a six-week high against the U.S. dollar on Monday as expectations that the European Central Bank will undertake further stimulus measures continued to fade. Now within sight of a two-year high set in October, charts indicate that a sustainable uptrend is at hand.
The euro/dollar's strong breakout above the middle point of a broad range-trading band in September has continued. Best viewed on a weekly chart display, we can see that the pair's rebound rally since retreating to $1.34 support on November 9 is strong and sustainable, with an upside target near $1.40.
(Read more: Resilient euro just won't be held back)
The trading band's lower support is located near $1.28. While this is not an exact level it has served as a support region and was tested in November 2012, as well as March, May and July of 2013.
The upper resistance level is near $1.40 – a long-term level that was created between October and November 2010 and acted as support from May to September of 2011 before the pair fell below that level. While it has not been tested since November 2011, the current breakout is moving towards this resistance level.
The euro/dollar has oscillated around the central trading support and resistance level near $1.34 since October 2011.
The breakout above $1.34 in September 2013 is part of a longer-term uptrend defined by trend line A, which starts in July 2013. The retreat from $1.34 and rebound in September 2013 provides the uptrend line's second anchor point. The uptrend line failed to hold as support during the November 9 retreat and now acts as a resistance feature.
The rebound from the central trading support level near $1.34 will travel along the uptrend line towards $1.40, testing that level as resistance. This trend line resistance feature reduces the probability of a fast rally towards $1.40.
Trend analysis using the Guppy Multiple Moving Average (GMMA) confirms the strength of the trend. To avoid confusion, we have not shown the GMMA on the chart. The long-term GMMA group of averages is well separated and moving upwards, which indicates good buying support from investors. The retreat on November 9 used the upper edge of the long-term GMMA as a support level.
The short-term GMMA remains well separated a sign of continued support from traders for the uptrend. When the euro/dollar falls other traders quickly come into the market to support the uptrend.
There is also a steady degree of separation between the long-term and short-term GMMAs, which is usually associated with sustainable trend behavior. All said, the continuation of the up move in the euro/dollar has the characteristics of a sustainable uptrend with an upside target near $1.40.
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.