The U.S. dollar rose to a four-month high against the last week leading investors to question whether a sustainable uptrend is at hand or if this is another false dawn. Charts analysis suggests the latter.
The down-sloping triangle pattern in the dollar-yen suggests a high probability of a retreat to 97;down-sloping triangle patterns are usually bearish. However, the dollar-yen has broken above the down-sloping trend line, which sets a weak upside target near 105.5.
This complex pattern development is best seen on a weekly chart. The pattern starts with a clearly defined down-sloping triangle pattern. The pattern has a well-tested support level near 101.5. The support level started in February, 2014 and has been tested frequently since.
The downtrend line starts from the high of 105.4 in January, 2014. This is a well-defined trend line and the dollar-yen has consistently reacted away from the line over the past six months.
The base of the triangle pattern is formed with five weeks of price activity consistently moving in the same direction. The candles in the triangle base are all the same color.
With the dollar-yen chart the down-sloping triangle is also part of a pattern of trading bands. The first trading band starts with support near 97.5 and resistance is near 101.5. The width of this trading band is measured and projected upwards to give a target for an upside breakout. The target level is near 105.5 - near the high achieved in January, 2014.
This shows that the trading band analysis is the more powerful chart pattern for the dollar-yen. The down-sloping triangle develops inside the trading band environment.
Down-sloping triangle patterns have a 70 percent probability of a downside breakout. This also means there's a 30 percent probability the downside breakout will not develop. When the downside breakout fails the most common result is for the price to move sideways using the support level. It's unusual for the price to move upwards in an upside breakout from a down-sloping triangle pattern.
Triangle pattern breakout targets are calculated by measuring the base of the triangle and then projecting this value from the point of the breakout on the trend line. With the dollar-yen chart pattern the breakout is near to the apex of the triangle pattern. The pattern price projection target is near 105.5. This is also the same value as the trading band price projection.
The breakout above the value of the down-sloping trend line has a lower probability of success. This means there's a lower probability that the breakout will achieve the upside projection targets near 105.5. This is a weak upside target with low momentum, so there is a high probability the rally will fail to reach the 105.5 target level. Traders use caution and a very tight stop loss for trading this rally breakout.
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.