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 the same line reverses its polarity and acts 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 anchor point of a higher trend line.
A fan 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.
The long term fan reversal pattern on the dollar/yen chart indicated a breakout from 79 with an upside target between 84 and 87. Price is moving steadily towards the 84 resistance level. There is a high probability of a retreat developing from this area. This rally peak will form the anchor point for a new trend line E.
This is how the pattern works with the dollar/yen chart. The breakout above the trend line C on the chart in 2011 February quickly moved to resistance near 84 before retreating. This peak at 84 provides the second anchor point for trend line D.
The breakout above trend line D is very bullish because this will set a new anchor point for trend line E. It may take six months to a year to fully develop. Usually it has three to five sections of the fan. The dollar/yen chart shows four fan sections so the balance of probability favors a successful rally towards 84 to 87 following the breakout above 80.
The retreat following the breakout used the upper downtrend line D as a support level and confirms 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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