Despite hiccup, rupee recovery likely to continue

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The Indian rupee was among emerging Asia's hardest-hit currencies amid the rout that hit markets earlier this year as investors braced for a tapering of the Federal Reserve's $85-billion-a-month asset-purchase program. The rupee has regained ground since touching an all-time low against the U.S. dollar in August, and despite a brief break, charts indicate that it's likely to continue down this path.

(Read more: Best performing currency in September? India's rupee)

In August, we looked at the dollar-rupee's rapid rise. The broad behavior of the chart patterns provided guidelines for the market's development, which were validated by subsequent developments. A new chart pattern has since developed, which provides guidance to the developments in the rupee.

Prior to the new parabolic trend pattern there were two dominant chart patterns on the weekly chart, not shown here.

The first was an upward sloping triangle. The base of the triangle was measured and projected upwards to give a pattern breakout target of 63.20. This target was achieved.

The second was a bullish flag pattern. The height of the flagpole was measured at the start of the pattern and then projected upwards to give a flag breakout pattern target near 66.30. This target was also achieved.

The combination of these two targets – 63.20 from the triangle pattern and 66.30 from the flag pattern – suggests the way the dollar-rupee trend may develop. In August we noted that traders will look for a continued move towards the flag pattern target of 63.20 followed by a consolidation or retracement that may use the 55.90 as a support level. Two and a half months later we can see how this chart analysis has developed.

(Read more: Will the rupee reprieve be over soon?)

The most important development is the confirmation of a parabolic trend line. Parabolic trends are found most frequently in bull markets, or markets showing volatile rebounds. A parabolic trend is best described using an arc, or parabolic curve. The price action uses a parabolic curve as a support level, starting off slowly and then accelerating very rapidly until activity on the price chart is almost vertical.

When prices move to the right of the curve the trend ends very rapidly, which often comes with a substantial price pullback that gaps well below the previous close. Typically a parabolic trend has a retracement of between 50% and 100% of the original move. The construction and behavior of parabolic trends is discussed more fully in GUPPY TRADING

The pullback in the dollar-rupee has paused near 61.00, a minor support level, which suggests that the current rally towards 64.00 is unsustainable. It is uncommon for a sustainable rebound to develop quickly following the collapse of a parabolic trend. There is a higher probability of a rally followed by a collapse and retest of support near 59.00, thus traders will look for short-side signals.

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Chart patterns applied to long-term currency charts are less accurate than when applied to other types of charts. This is because the currency market is subject to direct political interference. It's not a freely traded market in the same way as stocks and indexes.

This means that longer-term application of technical analysis patterns must be applied with caution. Technical analysis on the weekly chart provides a guide and framework for how future activity may develop with the rupee.