Price Action and Patterns

Talking Points

• GBPNZD Opens in Range
• R3 Resistance Sits at 1.9499
• Market Breakouts Signaled Under 1.9364

GBPNZD 30min Chart


The GBPNZD has started today’s trading at the upper end of its current daily trading range. Currently the pairs range resistance line lies near the R3 camarilla pivot at 1.9499. In the event that price respects resistance, traders can look for a potential price movement back towards range support. For today range support is found at the S3 pivot point at a price of 1.9409, completing the days 90 pip trading range.

A breakout Below the S4 pivot would signal a strong reversal back in the direction of the GBPNZD’s current daily trend. It should be noted that price has declined as much as 667 pip over the last six weeks of trading. Conversely a price break above R4 resistance at 1.9544, would indicate momentum shifting towards a new higher high. In either of the two mentioned breakout scenarios, the range should be considered invalidated for the day with traders then positioning themselves with the markets new direction.



---Written by Walker England, Trading Instructor

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Talking Points
-Elliott Wave Theory can provide clues to our location with a trend
-Two opposing scenarios suggest the probability of a bounce is elevated
-Lack of bounce and break below 1178 suggests we’ll likely visit 1105 and possibly 956

The USDOLLAR has been a stellar currency over the past several weeks. That outperformance has also anchored lower the price of Gold. Today, we will look at a possible bearish scenario followed by a potential bullish scenario. We will outline key levels to watch for invalidation of one of the patterns.

Bearish Gold

Many traders have been watching the multi-month triangle unfold. This is a bearish triangle that suggests we retest the 2013 low of 1178 and possibly lower. Under the Elliott Wave Theory, triangles are in the position of the wave sequence that precedes an ending wave. Said another way, though the triangle is bearish, the bearish burst lower is an ending wave of a larger degree of trend. Keep that in mind if we push below 1200.



Under this scenario, we’ll look for 5 waves lower to help us fine tune the ending move of an ending wave. It appears we are in wave 3 right now and we can establish some estimates based on Fibonacci ratios where wave 3 might terminate.
The most common wave relationship for wave 3 is to be 1.618 times the length of wave 1. Wave 1 may have finished July 15 at 1292. Therefore, wave 3 may find support near 1236 (see horizontal orange line). Prices have briefly penetrated lower, but are currently holding this line. Prices do not have to bounce from here, but this suggests an elevated probability of a bounce towards 1255 – 1270.

A bounce into the above cited zone would offer an opportunity for bears to re-establish short positions.

Bottom line under the bearish scenario, target new lows below 1178 with common wave relationships appearing at the 1105 and 956 price zones. This bearish pattern holds so long as price trades below 1290. (See idealized image below)



Bullish Gold

It is possible the dip below the June 2014 low is simply an extension of wave D of the triangle. Under this interpretation, Gold would need to rally fairly soon for a retest of 1345.

The lows we saw last week at 1225 came right on top of the 78.6% retracement level of the early January to March 2014 up leg.

Another possible price zone that would keep the bullish bounce alive is an equal leg relationship of the ‘D’ leg. This price point is near 1195 which also comes near the 2013 lows of 1178.



If we are still in the ‘D’ leg of the triangle, then a bullish rally would ensue taking price up to retest 1345. This scenario is invalidated on a print below 1178.

Bottom line for this scenario, prices are near a bounce point with another level down near 1195. So long as we are above 1178, respect the possibility of this scenario. (See idealized image below)



Conclusion

As a result, both scenarios taken together suggest an elevated probability of a bounce towards 1255. What happens above 1270 could eliminate the first scenario and lead to gains towards 1345.

On the other hand, a print below 1178 eliminates the second scenario and leads to declines towards 956 and 1105.
A bounce to 1255 that holds below 1290 keeps both scenarios on the table. Keep in mind, Elliott Wave Theory is probabilistic in that these are just two of the higher probability scenarios in my opinion. As market action develops, the more probable patterns emerge.


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Talking Points:

• Massive volatility has brought large moves to the currency market.
• This article uses price action to show traders how they can look to approach such environments.
• Traders need to focus on risk and cost of positions when trading in stretched markets.

So the past week has brought in a maelstrom of volatility. For many traders, this is a very, very good thing. Volatility to a trader is like opportunity. Low volatility environments means range-bound markets offering limited upside, combined with choppy or direction-less trends that can confound swing traders and position-builders alike.
As proof – take a look at most of the popular hedge funds and how they’ve performed over the past 18 months. It hasn’t been pretty.

But as summer has begun to fade into fall, volatility has found its way back in the market thanks to ECB-action, middling economic performance out of Japan, and improving data out of the United States; leading many to believe that interest rate hikes might not be too far off in the future.

These facts have helped to provide some nice moves for traders to work with… but it can present a challenge moving forward. With markets stretched, it can be difficult to find a comfortable entry – and further – with the potential for volatility that’s been seen thus far, traders have to account for the potential for that volatility to continue or perhaps even increase.

In this article, we’re going to look at a market that is beginning to look quite stretched and how traders might be able to approach it in an effort of taking a risk-conscious strategy into the environment.

The Yen

This is the theme that I’m personally most excited about right now; and the reason is the fundamental implications driving the move combined with what these types of themes have shown us previously.

In 2012, Shinzo Abe offered hope to the people of Japan after a two-decade deflationary spiral had engulfed the economy. This was marked by an extremely strong yen that made it extremely difficult for Japanese companies to remain competitive.
How might a strong currency destroy an economy? We covered that in the article, The Nucleus of the Forex Market; in which we showed how a strong yen made it more difficult for Japanese exporters to do business overseas. For an export-based economy, this can wreak disastrous consequences; as evidenced by the value of the Nikkei from its peak in the late 80’s going into the 2000’s.

The Nikkei Crash (as evidence of Japanese economic weakness)




In the summer of 2012, hope was rather dismal for the economy of Japan. The economic pressures of the previous 20 years had turned political, and turmoil had reared its ugly head with Japan’s top ranks. The country went through six different prime ministers from 2006 to 2012, and the future looked rather bleak.

Hope sprang from the campaign of Mr. Shinzo Abe; a man who had previously held the post of PM but had resigned in shame amidst scandal(s) in his cabinet. Mr. Abe based his campaign around economic initiatives designed to end and reverse the two-decade deflationary cycle.

Mr. Abe proposed three different ways to turn around the Japanese economy that became known as the ‘three arrows’ approach in an effort to address monetary, fiscal, and structural issues within Japan. The three arrows were/are fiscal stimulus, monetary easing, and structural reform.

The first two arrows were launched in Abe’s first few weeks on the job; but traders didn’t wait for Abe to take office to begin pricing these moves into USDJPY. The fiscal stimulus and monetary easing were very similar to the QE program embarked upon by the United States; and just like the US flavor of QE, these policies saw considerable weakness come into the currency.

The third arrow of structural reform is considerably more difficult; and this has been somewhat of a struggle thus far. So much of a struggle that Japan’s economy, and further their markets have yet to illustrate signs of recovery.

The most recent GDP print out of Japan was a 7.1% annualized contraction; and traders have begun to look for another round of QE out of Japan. Japanese economists including Mr. Kuroda at the head of the BOJ have begun alluding to the benefits of Yen weakness… this has created price movements showing anticipation of future intervention.

Will there be another round of intervention in Japan? Nobody knows, including those at the BOJ. We’re in a ‘wait-and-see’ mode.

But one thing is clear, and that is the trend in USDJPY. This market has moved higher so quickly that the chart is now appearing stretched; and trading in these environments can be even more daunting than a low-volatility type of environment.

How to Trade in a Stretched Market

The first thing we have to realize is that the market is stretched for a reason… and until prices move back to their previous range, we have to imagine that those reasons may continue to exist, and further – that these moves may continue in that direction.

But just as with any other environment we don’t want to blindly seek out reward without at the very least investigating the risk or cost of a position. We looked at this topic in How to Manage Risk with Price Action.

Traders have two ways of trading in a stretched market, and the way that they should look to is based on how aggressively they want to treat the trade.

Necessary for trading in a stretched market is risk management and the ability to get out of the position if it becomes clear that the trend will not continue.

The Aggressive Manner

The aggressive trader has a fear of missing out. This fear can be dangerous because it can be costly. But if a market is really hot, and if a move is going to continue – this aggressive mannerism of entering a position can allow for entries while the more conservative manner might not.

The aggressive way of entering a market is moving down to a shorter time frame to find a recent swing low. Traders can then place their stop under that swing low so that if this move doesn’t continue at the brisk pace the trader is looking for – the position can be closed before a bigger reversal may come into the market.

The chart below shows the setup in USDJPY on the hourly chart, along with recent swing lows that can potentially be used for stop placement. Notice that there is an aggressive and conservative support level offered, so traders can approach USDJPY in an aggressive manner with either conservative, moderately aggressive, or aggressive risk management.

Trading a Stretched Market in USDJPY



The Conservative Method

The conservative method of trading in stretched markets involves patience; and using the same support levels we looked at in the aggressive method but rather than entering a trader (for fear of missing out), the trader waits for price action to move towards a prior swing low so that a more affordable stop can be placed.

The best case scenario of the conservative method would be waiting for a ‘higher-low’ to develop so that the trader can place their stop below the previous low, allowing for somewhat of a cushion in the position.

--- Written by James Stanley


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Talking Points
-Don’t get married to a trade or currency
-Identifying the Next Likely FX Leader
-Know When That Has Failed

“If you cannot make money out of the leading active issues, you are not going to make money out of the market as a whole.”
“The leaders of today may not be the leaders of tomorrow.”
Jesse Livermore

Trading is simple but it isn’t easy. The simplicity is that trading often involves finding a strong currency via an uptrend on the charts and a weak currency via a downtrend on the charts. Once you’ve identified a strong currency and a weak currency, you can buy the strong against the weak until the trend ends. However, when that trend ends, it’s easy to become confused as to the next currency to focus on.

Don’t Get Married To a Trade or Currency



Traders can run into difficultly when a trade that was a sure thing is no longer performing like it once did, yet they’re trying to squeeze a few more pips out of it. If the trader has stayed in the trade or continues to enter short-term trades that start to show more losses it could be that the trend has changed and could be just getting started. As you can see above, the Euro started in an uptrend from 1.2750, the 2013 low, up to a high in early May ’14 of 1.3992 and due to recent ECB action, only a few monthly later, we’re back near the 2013 low of 1.2750 and could easily surpass that low.

Like the Euro in early 2014, what was once the leader doesn’t always remain the leader so you need to be able to have a flexible outlook and be ready to look for another trade when the leader is dethroned.

Identifying the Next Likely FX Leader



Many traders know that currencies can flip from strong to weak. However, they’re not sure where to look for the currency that could soon become the new strongest currency. It’s important to know that there is no guarantee but we can definitely find with probable cause what can become the next leader in FX.

The first place you can look when identifying the next likely big mover is to look for the next strongest currency. Another way to state this is a currency that is trending higher against all other currencies except the current leader. As of the time of this article, the British Pound meets this requirement. The GBP is up vs. the EUR, JPY, AUD, and other currencies but not the USD as the USD is the leader. Should the USD begin to weaken, the next strongest currency could become the British Pound.

AUD has recently flipped from strongest to weakest among G10 FX



The next place you can look is a developing fundamental story that hasn’t been priced into the market yet. A fundamental approach means a central bank move or a series of news events that begin to show weakness in a strong currency or strength in a weak currency. In early 2014, the very weak AUDUSD had a case of both stronger economic data and a central bank that was no longer talking down a currency.

Know When That Idea Has Failed

It’s important to have a short leash on a new trade idea. Because you’re trying to get in early, you have very little proof and should take counter-hypothesis price action seriously and not be afraid of closing out the trade with a small loss.

Happy Trading!

---Written by Tyler Yell, Trading Instructor


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Talking Points:

• Increased Volatility is good for breakout trading
• Donchian Channels can find breakout trade entries
• Sentiment can strengthen our Donchian Channel signals

We’ve seen an uptick in volatility the past couple of weeks across the board. This has led to some exciting opportunities for breakout traders as they take advantage of larger than normal price moves. One mistake that traders often make is ignoring the conditions of the market they are trading. They might be trading an excellent strategy, but if market conditions do not match up with the strategy’s style, traders might not like the results that they see.


David Rodriguez’s Weekly Outlook explains how much volatility has risen lately and how most pairs are ripe for breakout trading. So today we will look at a breakout strategy that has been a staple in my own account for years, Donchian with a Sentiment filter.

Download & Setup Donchian Channels

Donchian channels are not available on FXCM’s Trading Station Desktop by default. We must download and install this tool from FXCMApps.com. Follow the instructions below to get this tool available on your own charts at home.

• Go to the Donchian Channel download page, select purchase (it’s free).
• Input your information and download the file.
• Unzip the file and double click on the .exe file that’s inside.
• Complete the installation steps and close/re-open Trading Station Desktop.

Now that we’ve installed the indicator on our platform, we need to add it to our charts with the proper settings. Click the “Add Indicator” button above the charts (or click the “I” key on your keyboard). Select the Donchian Channel from the indicator list and click OK. We next want to adjust the settings to match the image below. Click OK.

Preferred Donchian Channel Settings



We should now see the Donchian Channels on our chart. It should appear as a price channel that adjusts to the high and low of the last 24 candles. Now we are ready to look for trade setups.

Finding Breakout Trades Using Donchian Channels

My preferred time frame for this strategy is a 1-hour chart. Once we are setup, it is very easy to identify breakouts. We simply need to wait until the current candle closes outside the Donchian Channel and then place a trade in the same direction. So when we have a candle that moves and closes above the upper line, we would initiate a buy trade. When a candle moves and closes below the lower line, we initiate a sell trade. The chart below shows a textbook example of a breakout sell trade.

Breakout Sell Trade Setup



Using SSI as Confirmation Filter

To further refine our breakout entries, I’ve found it’s a good idea to use SSI as a direction filter. For a full write-up on how retail sentiment is read and used, read My Favorite Trading Tool, How to Use the SSI. In essence we only want to take breakout trades that would put us in a position that is opposite of the retail majority. So we want to only take buy trades when SSI is negative and only take sell trades when SSI is positive.

EURUSD SSI



For the breakout example above on the EURUSD, Donchian gave us a sell entry. That means we want SSI to be positive in order to confirm the trade. It turns out that the SSI for the EURUSD is positive giving us a green light on this break out trade. Not every trade will be successful, but it turns out this breakout trade had stellar results, as seen below.

Successful Donchian & Sentiment Trade



In Conclusion

The increase in volatility is sight for sore eyes for most Forex traders, but this also means we need to adapt our trading technique to match these changes. The breakout strategy explained above is, in my opinion, a great way to attack this kind of market.

Good trading!

---Written by Rob Pasche


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Talking Points

• EURGBP Stays Range Bound Post NFP
• Range Support Sits at .7864
• Range Reversals Triggered Under .7808

EURGBP 30min Chart


Traders looking to avoid the volatility of this morning’s NFP event, can set their sights on currency crosses such as the EURGBP. Thia pair remained quiet, despite the rest of the market’s volatility, and has maintained its 38 pip trading range. Currently price has bounced off of range support, found at the R3 pivot depicted above. This will allow reversal traders to target the R3 line of resistance at .7864, in the event that price stays range bound.

If price moves out of the marked trading range, traders can begin positioning for a breakout. A drop below the S4 pivot, at a price of .7808, would signal the creation of a lower low and a move back in the direction of the daily trend. A move above R4 resistance at .7882 would create a bullish bias on the EURGBP on a break to new high highs. In either breakout scenario, traders should consider concluding any range bound positioning and trading with the markets new found momentum.


Yesterdays Update
Yesterday began with the NZDUSD breaking out to higher highs above R4 resistance. After prices attempted to retrace, the NZDUSD had again tested new highs by the conclusion of the trading day. To learn more about yesterday’s action, check out Thursday’s FX Reversal article linked below.

---Written by Walker England, Trading Instructor


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Talking Points:

• EUR/USD Sentiment Flips to Negative
• Long-Term Channel Support Near $1.25
• Potential Exits: Stop at 1.2480 & Limit at 1.2950

The Euro has taken a turn this week after its relentless free-fall the past few months. After falling to $1.25 last week, it has now risen as high as 1.2675. I am predominantly a trend trader and look to trade in the path of least resistance (in this case, selling the EUR/USD as its fallen), but there are a couple compelling reasons to consider buying the EUR/USD at this price.

EUR/USD SSI Flips to Negative - Bullish

First, we want to look at the recent shift in sentiment. The EUR/USD has had more retail buyers than sellers for almost three months; this has coincided with a drop in price for the pairwhic is often the case. We focused on this downtrend back in August when 66% of EURUSD Retail Traders were buying, and readers following SSI are now consequently sitting on a hefty profit.

But today, the SSI has actually flipped negative. This means there are more retail traders selling the EUR/USD than buying, a bullish signal. The chart below shows historical SSI alongside price and the most recent change in SSI’s direction.

EUR/USD Historical SSI & Price



The Speculative Sentiment Index is not a guaranteed signal. It does not mean that the EUR/USD is guaranteed to begin moving higher. But it certainly has piqued my interest in a potential long Euro trade, opposite of the retail trading crowd.

Weekly Chart Channel Support at $1.25 - Bullish

Moving on to technical analysis, the Euro has bounced at not only the psychological level of 1.2500, but a very significant supporting trend line. While trend lines typically require more than two points to become valid, we were able to project this trend line into the future by drawing a line parallel to the trend line created at the top of the chart pictured below. This method is further explained here.

EURUSD Weekly Chart – Bullish Channel



This weekly chart shows how strong the EURUSD bounce has been off of this key level. We are banking on this support level to continue holding to give us a successful buy trade.

Potential Exit Strategy for Euro Bulls

No trade setup is complete without an exit strategy. Looking at this setup in particular, it is clear that we want to set our stop loss below the most recent swing low. Traders can set their stop losses at 1.2480 to give our long position room to breathe as well as allow the trade to be closed out at a loss if a new low is created.

EUR/USD - Buy Trade Exit Strategy



Using a 1:2 risk:reward ratio (see Forex Fast-Track II), we can set our profit target around 1.2950. This will place the limit before price would hit the psychologically important $1.30 level and will put our exit right in the middle of a consolidation area we saw 3 weeks ago. We hope this will get us out of our winning trade before these potential resistance levels have an effect on price action.

The Euro’s Fork in the Road

No one knows with certainty if the EUR/USD will bounce higher or not. We can only look at similar situations in the past to create an educated guess on what may happen in the future. With the EUR/USD turning around at such a key level and SSI flipping negative, an argument can be made that the Euro could rally higher against the US Dollar.

---Written by Rob Pasche


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Talking Points
-Elliott Wave Theory can provide clues to our location within the USDJPY trend
-USDJPY continues climbing higher in 5th of 5th wave
-Daily chart shows wave relationships and reaction level in the 119 handle

USDJPY Daily




Fibonacci Wave Ratio Analysis

• Green wave 5 projects to 119.54 (green waves 1-3 times .618)
• Within green 5, red wave 5 projects to 119.81
• Intraday charts appear to be unwinding a series of wave 4 and 5’s (see video)

Bottom line, look for near term trends to finish off the larger picture wave 5 of 5. A shorter term trader can look to buy dips near 117.50-118.00 in anticipation of a smaller degree wave 5 towards 119.50
119.54-119.81 appears to be a point of attraction. This does not mean we want to short at those prices. This means the probability of a strong reaction lower is elevated if prices dig into the 119 handle.

If the longer term labeling is correct, then if a correction unfolds, dips could run for several weeks and retrace several hundred pips. The green 4th wave territory would provide longer term support should a dip develop that deep.


---Written by Jeremy Wagner, Head Trading Instructor, DailyFX EDU


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Talking Points
-Elliott Wave Theory can provide clues to our location within the EURUSD trend
-EURUSD finished a proposed ending wave of an ending wave of an ending wave suggesting a multi-week low on December 8, 2014
-Initial target zone is as high as 1.2900

EUR/USD Daily Chart



Fibonacci Wave Ratio Analysis

• 5 clear waves higher from the December 8 low suggests the shorter term trend has moved higher
• One scenario suggests an immediate thrust higher under a small wave 3 to 1.2765 (see video and scenario #1 below)
• A second scenario suggests a drop towards 1.2340-1.2370 with the movement since December 11 creating an expanded flat formation (see video and scenario #2 below)

Bottom line, look for opportunities to buy EUR/USD on a breakout higher above this morning’s high or on a dip near 1.2340-1.2370. A move below 1.2450 will begin to suggest a deeper dip is likely towards the 1.2340 area. The December 8 low is the risk level on a deeper dip.



If wave 3 unfolds, either immediately or next week, upside targets towards 1.2765 would be the initial step in a multi-week rally.

From a longer term perspective, wave 4 of the previous trend, meaning the green wave 4 often times acts like a magnet in counter trend rallies. Green wave 4 is near 1.2900 so there are a few pips available should the wave labeling be correct and a rally develop.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX EDU


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Talking Points
-Equal Waves pattern is a simple three wave pattern
-Compare the alternating waves of the pattern to determine if they are equal in length
-Equal Waves patterns can provide clues about the larger Elliott Wave structure



Many traders ask how to begin labeling their chart using Elliott Wave Theory. Try starting with the Equal Waves pattern. The video above describes what the pattern is, how to measure it, and what you can anticipate once the pattern is identified.

The Equal Waves pattern is a three wave structure. Therefore, it can also indicate what the larger degree Elliott Wave pattern in development.

For example, depending on where it shapes, the pattern could be the A or B leg of a flat correction, one of the legs of a triangle, an entire zig zag correction, one leg of a complex correction, or one of legs of a diagonal motive wave.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX EDU

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