The USD/CNY currency pair seems to be digesting its gains from Monday when the pair broke out above a trendline at the top of falling parallel channel. Since then, price has pulled back while being contained inside the range of Monday, the up day. On Wednesday, the pair fell below the prior day’s low before finding support at 6.9659, right at support of the 50-day exponential moving average (ema) (orange line).
Monday’s breakout needs further confirmation of strength before we can say that the breakout will hold and thereafter might lead to a sustained rally. Price has the potential to go to new trend highs if this is the case.
Continuation of the Rally
A continuation of the rally off the 6.8409 swing low is triggered on a move above the 7.0248 swing high. At that point the likelihood that price will trend higher off the channel breakout action increases. Still, we need to see a daily close above the 7.0733 swing high to confirm a bullish reversal of the descending channel.
At that point the possibility of an eventual advance to a new trend high above the 7.1842 peak becomes more likely. Higher targets include the 127% Fibonacci extension at 7.2776 and the 161.2% extension at 7.3964.
We can also watch for a moving average crossover to confirm strength, such as the 20-day ema (purple) crossing above the 50-day ema (orange).
On the Downside
If the 6.9659 low is broken, then a deeper retracement off the 7.0248 high is possible. In that case first watch for support around the 38.2% Fibonacci retracement area of 6.9546, followed by the 50% retracement at 6.9329. Further down is the 61.8% retracement at 6.9111.
What we would like to see to support a bull case for the channel breakout is a shallow pullback that completes within a relatively short period of time. Price then proceeds higher with enthusiasm and takes out the 7.0248 swing high with certainty. The longer it takes for price to follow-through on the initial breakout move, the greater the chance that another scenario might unfold.
This article was originally posted on FX Empire
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