Those who have been following me on my twitter feed would have noticed that 3 weeks back, i had specified that EURUSD would be in an uptrend and this would continue till at least 1.40 (this was when it was at 1.33). So, how did i conclude on the uptrend, in the first place, and how did i come to the conclusion that it would go on till 1.40 ?
Attached is the weekly chart and the daily chart of EURUSD. Here we notice an important pattern that is called ‘cup and handle’. This is a very rare formation and an ideal cup & handle would have to be preceded by an uptrend , for a bullish cup and handle and a downtrend for it to be bearish (a bearish cup and handle would be upside down). But in our case, we see a downtrend till feb 2009 (in the daily chart), followed by consolidation, then again a downtrend from April to June and an uptrend from June to beg of August (this forms the cup). Then we see a small downtrend from beg of Aug 2010 to end of Aug 2010 and then an upmove from Sep beg to mid of Sep (which forms the handle).
This is not a perfect cup-and-handle as it is preceded by a downtrend rather than an uptrend but this is ok in most cases. Also, the handle would usually go down to either 50% or 61.8% or 78.2% of the cup. In our case, it went down to 50%.
Then, in the third week of Sep, we see a break of the top of the cup (line with 0.0) which is the big indicator that the upmove is about to begin. care should be taken to wait till we see that the cup is broken and not assume that the top of the cup would be broken. I have seen man instances when the top of the cup never broke and it went down again.
So, we wait for the top of the cup to be broken and then, we see that over the next 2 days, we see a retracement which comes back to the top of the cup which is a retracement to the broken resistance turned support. This stage is very very important. we need to wait and see whether this retracement back into the broken resistance does hold or whether we fall back into the resistance region. If the resistance turned support does not act as support during the retracement, then it is a signal that the resistance break was a false break, which happens many times and hence we need to be very very careful with this.
In our case, the resistance turned support holds and we moved back up again. This is a clear indication that we are going up and we enter all our longs now.
Now that the uptrend is confirmed, how do we estimate the target as 1.40 ? I will explain this in my next article.
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