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Chart: Here is why the outlook for the euro is bearish

Sean Gallup | Getty Images

Some patterns of price behavior repeat and we cannot explain why this happens. However the repeated pattern opens the way to profitable trades. The euro-dollar chart shows a pattern of trend collapse that puts the downside target near 1.05.

The weekly chart shows two parallel up-sloping trend lines the help define price activity between a very broad trading band. The lower edge of the trading band is near 1.05, while the upper edge is near 1.145. It's not unusual to see a pattern of rally and retreat between these types of trading bands.

What is different with the euro-dollar is the well-defined uptrend line. The first line defined price activity for 6 months. The break below the trend line moved quickly to rest support neat 1.05.

The second trend line is parallel to the first but this is coincidental. It's the nature of the price activity which is more important. The second trend line also lasted 6 months before the price dropped. The breakout was different with a rebound that used the trend line as a resistance point. The recent pullback towards 1.10 suggests that bearish pressure is building on the euro-dollar. A move below the recent and temporary support level near 1.09 will confirm this bearish pressure. If this develops, then traders will watch for a rapid retreat to near 1.05.

The reaction near 1.05 has strong characteristics of a rally rebound. Once the support area between 1.05 and 1.06 is reached, then there is often a fast rebound. The euro-dollar offers a rapid fall and a rapid rebound making this good territory for traders.

Aggressive traders should use the ANTSSYS method to trade the retreat and the rally rebound. Cautious traders and investors should wait for the move below 1.09 before taking aggressive short positions.

There is no indication that euro-dollar will break out of the tightly constrained trading band that has dominated the market since April 2015. However, the rally and retreat behavior inside this trading band provide some excellent trading opportunities.

Daryl Guppy is a trader and author of The 36 Strategies of the Chinese for Financial Traders, available from guppytraders.com. He is a regular guest on CNBC in APAC and a speaker at trading conferences in Asia, Australia and Europe.

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