EURUSD’S medium term rise from the September 10, 2010 low of 1.2643 is complete at the November 2010 high of 1.4281 as prices have extended lower in recent weeks reaching 1.2968 on November 30, 2010. This fall from 1.4281 remains active until daily prices open and close above 1.3468, as this will favor further rise targeting 1.3787. However, until prices close above 1.3468, look for further downside extension to continue in the days ahead targeting 1.2870 followed by 1.2643. As to the broad outlook, EURUSD remains in a declining wedge formation from the 2008 high of 1.6037 as this broad consolidation pattern favors an upside break in the months ahead. This pattern is less than 50% developed, therefore probability is that EURUSD prices will be confined within the descending wedge formation in the months ahead as the potential range for EURUSD for 2011 is 1.1450-1.4500.
GBPUSD’s remains in a broad symmetrical triangle pattern from the 2009 range of 1.3502-1.7042 as this pattern will break sometime in 2011. Look for a monthly open and close outside this paterm to support further price extension in the direction of the break. For January 2011, a monthly close above 1.6215 will favor further rise targeting 1.6395 followed by 1.6721 while to the downside, a monthly open and close below 1.4658 will favor further downside extension targeting 1.4303 followed by 1.4110.
Below I have listed essential triangle or symmetrical triangle pattern criteria, all of which apply to the current pattern witnessed on the monthly GBPUSD chart.
1. Trend : In order to qualify as a symmetrical pattern, an established trend should exist. The prior trend should be several months old and the symmetrical triangle marks a consolidation period before continuation or trend reversal.
2. Four (4) Points : At least 2 points are required to form a trend line and two trend lines are required to form a triangle, however, 3 points per trendline are needed to confirm. Therefore, a minimum of 4 points are required to begin considering a formation as a triangle. Ideally, the breakout occurs after 6 points (3 on each side). At this writing there are 4 lower points and 3 upper points.
3. Volume: As the triangle extends and the trading range contracts, volume begins to diminish. Such has been the case the last few weeks. This is known as the quiet before the storm, or the tightening consolidation before the breakout.
4. Duration: The triangle can extend for a few days to a few months and is directly related to the recent trend. The strength and momentum of the subsequent breakout is directly proportionate to the duration of the symmetrical pattern. The current pattern as a duration of several months as a strong trend will likely follow once the breakout occurs.
5. Breakout Time Frame: The ideal breakout point occurs 1/2 to 3/4 of the way through the pattern’s development or time-span. The time-span of the pattern can be measured from convergence of upper and lower lines. A break before the 1/2 way point might be premature and often a false break, most breakouts occur after 2/3 of the pattern is complete.
6. Breakout Direction: The future direction of the breakout can only be determined after the break has occurred, thus when such breakouts do occur the resulting extension will be supported by strong trend dynamics.
7. Breakout Confirmation: For a break to be considered valid, it should be on a closing basis with a price (3% break) or time (sustained for 3 days) filter to confirm validity. However, in that the current pattern duration is more than several months in duration, a monthly open and close outside the pattern will be required to confirm the break. Additionally, as the breakout unfolds, an expansion in volume and momentum will occur. As often occurs, once prices break above or below the trendlines, a retest of the trendlines as support or resistance usually follows, thus allowing opportunity to enter a position once the breakout is confirmed.
8. Return to Apex: After the breakout (up or down), the apex can turn into future support or resistance. The price sometimes returns to the apex or a support/resistance level around the breakout before resuming in the direction of the breakout.
9. Price Target : There are two methods to estimate the extent of the move after the breakout. First, the widest distance of the triangle can be measured and applied to the breakout point. Second, a trend line can be drawn parallel to the pattern’s trend line that slopes (up or down) in the direction of the break. The extension of this line will mark a potential breakout target.
Conclusion: The current multi monthly consolidation pattern on GBPUSD is nearing its end, with potential for a breakout to occur in 2011.
Spot Gold (XAUUSD) has reached 1,431 in December 2010, just shy of our 1,436 target which was to 100% extension from 680 of the 275-1,032 rise. Look for further rise in 2011 targeting 1,436, 1,726, 1,815 and 1,904 while 1,144 supports , as ONLY monthly open and close below 1,144 will complete the rise from 680 at 1,431. Inital buy zone of 1,294-1,326 in the days ahead while a month close below this zone will favor further downside correction towards 1,144.