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FLAGS AND PENNANTS


Euro At Half-Mast

11/03/04 11:12:30 AM
by Chris Manuell

The euro recently escaped from a confined trading range with a sharp move higher, confirming the breakout, and is now pausing for breath.

Security:   Euro
Position:   N/A

The euro managed to break the shackles of resistance in the 124.50 region and enjoyed a sharp thrust higher, culminating in a close outside the Bollinger Band on October 25. Bollinger Bands are two bands that are located above and below a moving average at a distance of two standard deviations. This enables the bands to capture 95% of the price data and allows them to be used as support and resistance levels. A close outside the bands indicates that the market has become overexuberant and is vulnerable to a correction. The euro has since corrected from the move outside the band, and traders looking for a resumption of the uptrend would be looking in the vicinity of the middle band or 20-day moving average (MA) to provide support where they can add to long positions.

The euro has also developed a flag the common continuation pattern. The flag represents a pause in an existing dynamic price move, which is preceded by a sharp thrust higher. Flags tend to "fly half-mast from a flag pole" as they emerge at the halfway mark of a move and enable a price projection to be calculated. Measuring the distance from the breakout point in the euro at approximately 124.60 to the start of the flag at 128.15 gives a difference of 3.55. Prices should move at least this amount from the completion of the formation, which would set up a challenge of the highs of the euro.

Figure 1: Euro index daily chart
Graphic provided by: StockCharts.com.
 
The moving average convergence/divergence (MACD) histogram can also help identify points where the market will find support; the histogram often finds support at the zero line as the moving averages converge. A move to the zero line in uptrends often presents traders with a good buying opportunity.



Chris Manuell

Chris Manuell spent 7 years as a futures sales/trader for a large investment bank and more recently as a technical analyst for an independent research company. He has a bachelor of economics and graduate diploma in applied finance & investment. Currently enrolled in the CMT program with the MTA.

E-mail address: chrismanuell5@yahoo.co.uk

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