EUR/USD Trading In a Potential Pennant Pattern

EUR/USD (daily chart as of 7/19/2013) has been trading in a range between 1.30 and 1.32 for six trading sessions. Both 1.30 and 1.32 are key resistance/support levels to watch. From the daily chart, we have a potential pennant pattern in the making. A pennant is a small symmetrical triangle, usually with a neutral slope. The pattern duration for a symmetrical triangle is usually from a few weeks to many months, while the duration for a pennant is usually shorter. Technically, both pennants and symmetrical triangles are continuation patterns, which means that the previous trend should continue after a valid pattern breakout.

If price breaks out above the pattern, the pair could resume its previous uptrend to test 1.32. We need a break above 1.3200/50 for more upside momentum to test 1.3400/15, the high of June 17 and also around a major long-term downtrend line extending from 2008 (as shown on the daily chart). Note that the projection target for the pennant pattern is also around the 1.3400 area. To the downside, if price breaks down below the lower boundary of the pennant, it may test the key 1.30 support again. From there, watch for a possible pattern transformation from a pennant to a potential flag (a small rectangle sloping against the previous trend), or to a potential descending triangle. Both flags and pennants are short-term patterns, while the various types of triangle patterns are longer-term patterns. The daily MACD is making a “golden cross” from below zero, and the RSI is rising from 50.