The euro-dollar chart shows the consequences of a failed triangle breakout.
The euro-dollar developed an end-of-downtrend pattern starting in March 2015. The pattern was defined by a strong resistance level near $1.14 and the up-sloping trend line B, a combination that created an up-sloping triangle pattern.
The up-sloping triangle pattern is usually associated with an upside breakout. So, as the price activity approached the apex of the triangle, traders were preparing for an upside breakout.
However, the euro-dollar chart shows another strong feature - a long-term downtrend line A.
The apex of the up-sloping triangle lies to the right of the downtrend line. As price action moved towards the downtrend line, it emerged that the downtrends line was a more powerful force on the market than the up-sloping triangle pattern.
The result is that the up-sloping triangle pattern has failed and the price has moved below the trend line B.
The triangle pattern is still useful because the base of the triangle is measured. The value of this is then projected downwards from the point where the price moves below trend line B, which gives a downside target near $1.
We use the ANTSSYS trade method to trade the fall below the value of trend line B. And we use the broader strategic analysis of the euro-dollar behavior to trade a long-term retreat to $1.
Traders will watch for new consolidation patterns near the $1 area. Any rebounds from $1 will use the downtrend line A as a resistance level.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, available at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box and a speaker at trading conferences in China, Asia, Australia and Europe.