The long term fan reversal pattern on the dollar/yen chart is pointing towards a breakout from 79 with an upside target near 84 and 87 yen. A new support base has developed near 78. This was a previous resistance level. The compression of activity between support near 78 and the value of downtrend line D increase the probability of a fast breakout.
The fan pattern consists of a series of trend lines, all starting from the same high point. These lines first act as a support level, and then later as a resistance level.
The price activity is contained between these trend lines. When a breakout occurs the rally is capped and this creates the location point of a higher trend line. The fan pattern starts from the August 2008 highs near 110 yen.
A fan pattern develops as a trend starts to change direction. It is most commonly seen in a downtrend. The pattern occurs when prices are re-valued upwards, but the direction of the trend does not change. This appears on the chart as a shift sideways. The old resistance level acts as a new support level.
The new resistance level does not run parallel to the old support level. As price action moves horizontally in time the price uses the new resistance line as a limit area. A break above this is often decisive, making a new high before pulling back to use the old resistance level as a new support level.
This is how it works with the dollar/yen chart. The breakout above the trend line C on the chart in February 2011 quickly moved to resistance near 84 before retreating. This peak at 84 provides the second anchor point for trend line D. The value of this trend line is currently under threat with a high probability of a breakout.
A breakout above trend line D is very bullish because the fan pattern reversal is typically a very long term pattern. It may take six months to a year to fully develop. Usually it has three to four sections of the fan. The dollar/yen chart shows three fan sections so the balance of probability favors a successful rally towards 84 to 87 with a breakout above 80 in the short-term.
A retreat following the breakout that uses the upper downtrend line D as a support level would confirm the development of a new uptrend in the dollar/yen chart.
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.
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