The euro-dollar rally has continued in recent weeks, hitting a peak of 1.14 last week. While the breakout initially looked like a short-term move rather than a trend change, the situation now is different and that impacts on long term positions.
The fast and decisive breakout above the historical resistance level near 1.10 has encountered short term resistance near 1.14. This has the potential to develop a inverted head and shoulder trend reversal pattern. The pattern is completed with a small retreat from short term resistance near 1.14 followed by a rally that moves above 1.14 and tests resistance near 1.16. In this case it's the confirmation of the inverted head and shoulder pattern that is more significant than the historical resistance near 1.16.
Confirmation of an inverted head and shoulder pattern sets an upside breakout target near 1.22. This is well above the value of the downtrend line. This confirms a new uptrend rather than just a rally and retreat pattern.
The key development is the confirmation of the inverted head and shoulder pattern. Traders will watch carefully for confirmation of this pattern.
There are two dominant analysis features on the euro-dollar chart. The first is the obvious downtrend. 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 second feature is the well-established pattern of trading bands. These trading bands have acted as historical support and resistance levels. The key numbers are resistance near 1.16 and then resistance near 1.28.
We use the ANTSSYS trade and analysis method to identify the opportunities as the right shoulder of the chart pattern develops. This is traded with a tight stop using a customised ATR indicator. The objective is to trade the trend breakout continuation towards 1.16.
The euro-dollar activity may confirm an inverted head and shoulder pattern. If so, then this changes its strategic outlook.
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.