EURUSD breaks out of bear flag. Interesting post-breakout behaviour

Hello everybody,

I have a chart of the EUR/USD pair for today. Following my last post on EURUSD, price collapsed by about 600 pips to form a minor low at the 1.2300 region. Then, EURUSD started retracing to 1.2700. A small upward parallel channel formed. Just by looking at these two periods of price action, a chartist should suspect a bear flag in the making. On Thursday, May 21, EURUSD fell 150 pips to break out of the channel; this triggered a short set-up for me. Knowing I had quite a strong bear call on equities and so a bull call on US dollar, I made more than one short trade. On May 29, good news sent EURUSD up by 200 pips. I say again: thank goodness for stop-loss orders. As I have learnt the hard way in the past, “one day’s movement does not a trend make”. In other words, a sharp move on one day does not necessarily mean a change in trend.

EURUSD slid down and reduced the long green candle to nothing. Friday’s low took out the minor low at 1.2286. I want to illustrate to all of us a certain possible post-breakout behaviour of flag patterns. After a breakout from a flag, a chartist will expect price to continue in the direction of the breakout. However, sometimes the market will mess around with you; after all, making money cannot simply be as easy as looking for shapes that a pre-schooler can identify too right? What I have realised from looking at charts closely is that price sometimes dives back towards the flag. As a chartist, this is always a scary moment. Flags usually do well, so anything like that is going to bring down a chartist’s morale. But, one must extend the trendlines from the channel (flag), and see if price finds support at the trendlines. This is how channels that have been broken can still play a part in chart analysis. In the chart below, I circled an area in blue showing how the long green candle stopped right at the extended flag trendlines. It may be risky to look for short set-ups in such scenarios (I, for one, did not), but failure at this resistance area should prompt you that the flag pattern will not fail. In this case, EURUSD put in three convinving red candles to close at 1.2280 on Friday. My flagpole is not distinct and clear-cut, so for trading purposes, I do not have an exact target. But, I will continue to look for more downside.

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

 

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