Charting Asia

Why the euro-dollar rally won't last

Dollar rally over? What strategists say

The euro may have rebounded more than 6 percent from its lows of 1.05 against the U.S. dollar, but chart analysis shows that rally may be shortlived and the downtrend remains intact.

There are two dominant analysis features in the euro-dollar chart. The first is the obvious downtrend. Although the downtrend is easy to see, it is a little more difficult to define with a single downtrend line. The chart shows what we think is the best fit for the trend line as it captures the majority of the extremes in the rebounds. The position of this line captures the largest number of high points and excludes the least number of high points. But it still remains a judgement call.

The second feature is less obvious. This is the well-established pattern of trading bands. These trading bands have acted as historical support and resistance levels. The trading band line near 1.28 acted as support in April to June 2013. Then, it became a resistance level in October 2014. The line near 1.10 is currently acting in the same way so the breakout above resistance near 1.10 is significant.

This is not a change in the direction of the trend. This is part of a consolidation pattern. A bullish outcome is for a retreat and retest of 1.10 as a support level. A less bullish outcome is a retreat and a retest of 1.05 as the support level.

The upper limits of the rally are capped with the value of trend line A. We use the ANTSSYS trade and analysis method to identify the rally continuation and trade this with a tight stop using a customised ATR indicator. The objective is to trade the rally continuation towards 1.16 before making an exit on a protect profit stop. This exit also opens the door to a short-side trade with a downside target near 1.10. Traders use ANTSSYS analysis to identify the short signal.

The euro-dollar activity is constrained and defined by the trading band behavior. The direction of the trend remains intact until the currency pair can move above both the trend line and the trading band resistance line near 1.16.