The euro's decline against the U.S. dollar late last week may have given some investors a scare, but charts indicate that pair is exhibiting characteristics of a sustainable uptrend.
The posted its biggest one-day decline against the U.S. dollar in 16 months last Thursday on the back of three factors: weaker-than-expected economic data from the euro zone; slightly less-dovish-than-expected post-policy-meeting comments from the Federal Reserve; and comments from European Central Bank governor Nowotny that the central bank would provide more liquidity to avoid a "cliff" effect once the bank's cheap loans to euro zone banks come to an end.
However, despite the pair's sharp single-day decline technical analysis shows signs of a sustainable uptrend.
The euro-dollar has developed a strong breakout above the middle point of a broad range trading band, which is best observed on a weekly chart display.
The trading band's lower support level is located near $1.28, and while it's not an exact level it has served as a support region. It was tested in November of 2012, as well as March, May and July of 2013.
The upper resistance level is near $1.40. This is a long-term level that was created from October to November of 2010 and served as a support level in May to September of 2011. While it has not been tested since November of 2011, the current breakout is moving towards this resistance level.
Since October of 2011 the pair has oscillated around the central trading support and resistance level near $1.34. Between September 2012 and September 2013 it remained in the lower section of this trading range between $1.28 and $1.34.
The breakout above $1.34 is part of a longer-term uptrend defined by trend line A, which starts in July of 2013. The retreat from $1.34 and rebound in September of 2013 provides the second anchor point for the uptrend line; the current retreat is testing the uptrend line as a support level near $1.35.
A rebound from this support level would test $1.40 as resistance, while failure of the trend line near $1.35 has the next support level near $1.34 – the central support resistance level in the broad trading band. Failure of the uptrend line suggests the pair would trade in the upper section of the trading band between $1.34 and $1.40.
Trend analysis using the Guppy Multiple Moving Average (GMMA) – not shown on this chart – confirms the strength of the trend and the high probability of a continuation towards $1.40. The long-term GMMA group of averages is well separated and moving upwards, which shows good buying support from investors. The short-term GMMA is also well separated, which shows strong support from traders for the uptrend. When the pair 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 GMMA. This type of steady separation is usually associated with sustainable trend behavior. This up move in the euro-dollar is not just a rally; it 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.