July 20, 2010: The euro-dollar pair completed the first phase of its bullish pattern last week and is now correcting. The bullish pattern is still intact, but a correction is in play before the next leg up. .

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In the past three months, the pair has formed an inverse head and shoulder, which is an extremely bullish chart pattern. Check the chart link below

On July 1, the euro-dollar pair rallied strongly and broke the neckline as shown in the chart, which confirmed the bullish pattern.

Once the neckline is broken, a pair can rally between 75% and 100% of the measured move from the neckline break point.

The measured move is the distance from the top of the head straight up to the neckline. For euro-dollar, the measured move was around 600 pips. This essentially meant that the pair could rally after the neckline break to the range of 1.2928 — 1.3077. Just like we had predicted in last week’s column the euro-dollar pair came near the 1.31 area, which is resistance, and paused.

The pair can still go to the 1.31, but it does not make sense going long now as the reward is minimal. The risk on the other hand is high as chart patterns point to a possible correction to the 1.27-1.26 area.

It makes sense for longs to take some profits now and wait for a pullback to the 1.26 area to go long. Counter-trend traders can consider shorting the pair with a stop above 1.3125 and a profit target in the 1.27 area.

The euro-dollar pair is showing relative strength as it did not fall like some other pairs. The US dollar appreciated strongly against the Australian dollar, the Swiss Franc, the Canadian dollar, the British pound and the New Zealand dollar last Friday. The flight to the US dollar from these currencies was due to a combination of risk aversion with the fall of US equities and the pair themselves hitting resistance.

US dollar-yen
The yen like the euro appreciated against the dollar last week as the Japanese currency is also considered a safe haven currency like the dollar. On this pair, watch out for support in the 84-85 range — which is a nice area to go long. Shorts can book profits around 85.25.

British pound-US dollar
The pair hit strong resistance in the 1.54 and 1.555 area last Thursday and declined and can go to 1.51 initially.

Australian dollar-US dollar
The pair hit resistance at 0.8865 on Wednesday and has since fallen. If the pair closes below 0.8681, prices go down to the 0.8450 area.

New Zealand dollar-US dollar
This pair gave the biggest bang for the buck, last hitting resistance in the 0.7300 area and falling 200 pips on Friday. The pair may see some bounces but charts point to a medium-term target in the 0.69 area.

Chart Analysis

EUR USD Chart