The Euro's Cup With Handle Rally

10/23/03 11:54:09 AM

by David Penn

An intraday breakout in the EUR/USD sets the stage for an important test of the October highs.

Security: EUR/USD, EUR A0-FX
Position: N/A

Will the euro take out the May/June 2003 highs? Right now, all forex eyes are on the euro's autumn rally, which has seen the European currency advance from just north of 1.0750 to just north of 1.1800 in less than two month's time (a move of 1,050 points!).

October has seen relatively less committed action to the upside in the euro. In fact, there is an argument that the euro has traded sideways for the most part during October. This has certainly been the case relative to the blistering September performance of the euro. But, with regard to the October price action, can this relatively sideways motion be signaling an end to the September/October 2003 rally in the euro? And if so, does this also signal a major reversal in trend for the euro, including a subsequent correction that would likely retrace not just the more recent gains in the euro, but also perhaps retrace a significant share of the euro's two and a half year old bull market which began in the summer of 2001, with the euro trading at about 0.8349?

First, a look at how the euro got to this point late in October. The recent move above 1.1800 in the euro appears to come courtesy of a cup with handle breakout. The cup with handle began on October 19th and moved downward in an irregular scallop until mid-day on October 20th. This, incidentally, is most easily seen on an hourly chart (such as the one in Figure 1).

Figure 1: Given a formation size of 100 points, this cup with handle set up a breakout from 1.1700 that reached 1.1800 in just a few hours.

Graphic provided by: eSignal.

From October 20th, the euro began rounding upward fairly steadily, testing the 1.1700 area for resistance once early on October 21st and then again later in the day. The third test, apparently, was the charm as the euro broke out strongly on the 22nd, rocketing 50 points in the hour-long breakout. The price objective for this formation called for an initial move to 1.1800, which was accomplished swiftly.

Figure 2: Both early October and mid-summer highs loom as resistance to any continued advance in the euro above 1.1935.

This cup with handle breakout to the upside sets up a major test of the early October highs in the euro. In fact, if this breakout actually represented a new leg up in the euro's bull market, then a test not only of the October highs but of the mid-summer highs around 1.1935 would be in store.

As of this writing, the euro actually looks like it is working its way through a possible 1-2-3 trend reversal, as shown in the figure below.

Figure 3: The resolution of this 1-2-3 trend reversal set-up should serve as a helpful guide toward the near-term future of the euro.

The euro is currently in phase two of the 1-2-3 trend reversal (popularized by Victor Sperandeo in his Trader Vic -- Methods of a Wall Street Master). Phase one is the initial trendline break. Phase two represents the attempt to regain the previous trend and to set, in this case, a higher high. Phase three, should it occur, would be a failure to set a higher high (or, having set one, the failure to follow through to the upside) and a reversal that takes prices below the low of Phase one -- here at about 1.1545.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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CUP WITH HANDLE

The Euro's Cup With Handle Rally

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