Financial markets round the world collectively held their breath in early August when Standard and Poor's downgraded the U.S. triple-A gold standard debt rating for the first time ever.
As we noted at the time, the euro-dollarweekly chart showed an equilateral or pattern, which can be interpreted as indecision in the market.
This is a broad triangle pattern that did not have a well defined base so it was unwise to apply the price projection targets with a high degree of certainty. Once the breakout developed ,there was high probability it would move quickly. Using the chart pattern, the upside breakout has a potential first resistance target near $1.49. A downside breakout has the first support target near $1.36.
Chart patterns capture the behavior of market participants as they react to news and changing perceptions of value. Chart patterns are used to identify outcomes of high probability and points in time where the balance of probability is shifting. When targets are created they must also be verified against a previous history of price activity. Target calculations are more reliable if the target level has also acted previously as a support or resistance level.
The down side target projection of $1.36 was also a prior support level. This target was rapidly achieved when the downside breakout developed. It is the pattern of support and resistance that helps calculate the next set of downside targets. Despite the strong rally behavior seen in the Euro-dollar the chart is dominated by well defined support and resistance levels. A fall below $1.36 has a historical support range near $1.29. A fall below $1.36 has a high probability of quickly touching support near $1.29.
The $1.29 level is the upper edge of a well established trading consolidation band. The lower edge of this band is near $1.24. Any fall below $1.36 has a high probability of cascading into a fall to $1.29, which in turn, will have a high probability of quickly falling into the consolidation support area with a potential downside target near $1.24. Support near $1.36 is comparatively weak and this reduces the probability this level will act as a strong rebound area for a rally back to $1.43 and higher.
This fall in the Euro-dollar is reflected in the rising strength of the dollar index.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –. He is a regular guest on CNBC's Asia 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.
CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.