EUR/USD in Daily Flag Pattern

01/07/2010 12:01 am EST

Focus: FOREX

James Chen

Chief Technical Strategist, FX Solutions

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(Price on 1st pane, Slow Stochastics on 2nd pane; horizontal support/resistance levels in yellow; uptrend lines in green; downtrend lines in red; chart patterns in white; 50-period simple moving average in light blue.)

Price action on EUR/USD, a daily chart of which is shown, has consolidated in an inverted flag-like formation since late December. This occurs after price dropped substantially starting in the beginning of December, breaking down below a key uptrend that had been in place since the March lows. In the process of dropping, EUR/USD also broke down below several key support levels, the most recent of which was the approximate 1.4450 price region.

After breaking down below this level in mid-December, price has repeatedly attempted (but failed) to break out above it once again, forming the noted flag consolidation in the process. If this flag turns out to be a true continuation pattern, a break down below the formation should confirm a continuation of a new downtrend. In this event, a major further support target to the downside resides around the 1.3800 price region.

Conversely, if price manages to make a strong break and close above the noted 1.4450 resistance region, the pair could target further upside resistance in the 1.4800 price region.

By James Chen, chief technical strategist,