Strategy of the Week – 3/26/17 – EURJPY

Strategy of the week – EURJPY

Trading channels

EURJPY price is moving inside a daily descending trading channel:

$EURJPY– Daily trading channel

The technical rules for trading channel are quite simple:

  • As long as the price remains inside the channel – Trade the channel’s range.
  • When a breakout occurs, trade in the direction of the breakout

Right now EURJPY is testing the bottom of the trading channel. It reached the bottom of the channel following a strong reversal that started at the PRZ of a bearish harmonic pattern (learn more about harmonics).

The bullish scenario:

According to trading rule number 1, the 119.5 level is a potential Buy Zone in EURJPY…

If you want more reasons to buy EURJPY near 119.5, you can see that we have also a bullish harmonic pattern (AB=CD pattern) with a PRZ inside this price zone.

Buying EURJPY near 119.5 is considered to be an aggressive bullish entry.

If you want to be more conservative and cautious with such counter trend setup, there’s another approach that you can consider:

The price is currently below a psychological round number – 120.

Should the price climb and close above 120, it will allow a more conservative bullish entry with a 50 pips stop loss (below 119.5) and 50-100 pips potential reward (120.5-121). In such scenario you get a “safer” entry and still keep a R/R of better than 1.

The bearish scenario

If your longer term analysis suggests that EURJPY is heading much lower and you prefer to sell highs vs. buy lows than 120.5-121 is the potential Sell Zone you should be focused on.

The top of the trading channel, Fibonacci levels (61.8 correction from previous peak) and multiple MA lines (daily chart and 4H chart) create a potential Sell Zone that can send EURJPY back to the bottom of the channel and towards 119 to test the next daily support zone, which is close also to the 200 days MA line (support).

Summary

My longer/mid-term analysis leads me to think that the odds of seeing EURJPY above 121 again (bullish breakout) are higher than the odds that we will see this pair diving below 118 (bearish breakdown).

The question is whether the next bullish wave will start from 119.5 or from 118-119, which is a much stronger weekly support zone for EURJPY.

Obviously no one answer this question right now. We will have an answer if and when EURJPY will exit the channel’s border. Till then, all you can do it to trade the channel or sit aside and wait.

 

 

 

 

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Strategy of the Week – 02/27/2017

Strategy of the week – AUDUSD

AUDUSD has been banging on the 0.77 resistance zone for almost a year now.

The technicals are starting to show sign of fatigue. Will it finally give up and surrender?

AUDUSD – Fundamentals

As I’ve explained in this week’s weekly newsletter, this trading week will be mostly about the U.S Dollar.

We have president Trump speaking on Tuesday (for some its Wednesday – Check local time) and Yellen on Friday. AUDUSD, as all of the Majors, will “suffer” the volatility that is expected in the Dollar Index.

In addition, you have to pay attention also to the AUD GDP numbers that will be published few hours before Trump’s speech.

The economic calendar suggests that the most volatile time for AUDUSD is expected to be between Tuesday and Wednesday. If you do not know how to handle such volatility (or to trade high impact events) perhaps it is better to stay away from AUDUSD during this time and wait for opportunities that will emerge once the dust is settled.

Key Price Zone – 0.77 

The key price zone for this trading week is the 0.77-0.775 resistance zone.

As the daily chart above shows us, this zone was proven as resistance (structure) many times since April 2016. In addition to the structure we also see trend line resistance (proven as well) that adds weight to this resistance zone.

For about a month now, AUDUSD has been consolidating between the Fast MA line that still holds as support and the 0.77 Price Zone. The price formed a Rising Wedge pattern.

If 0.77-0.75 is the key Price Zone from above, the Fast MA line is the key technical element from below – A breakdown of this MA line will signal that AUDUSD intends to test the 50 MA line (near 0.75-0.76).

Zooming into the 240 minutes chart brings more bearish signals:

  1. Short term uptrend lines that now should act as resistance lines (see trend line above and also additional trend line in the chart below).
  2. The price is currently below the 50 and Fast MA lines (bearish sign)

Basically, the 240 minutes chart suggests that the bearish move has started already…

But…

  • This is just Monday.
  • We have so many high impact events coming for AUD and the USD that this early bearish signal can turn to a false signal in seconds.

In fact, if you zoom in even more, into the hourly chart, you actually have a short term bullish scenario:

0.766-0.767 is a minor structure support zone and it is also the potential C point in what can turn out to be a bearish Bat pattern (read more about Bats).

Those of you who are familiar with harmonic trading can recognize this scenario as a potential Aggressive C entry (in this case bullish) – You buy the C point and expect the price to reach D and complete the pattern.

Summary

Despite the short term bullish scenario described above, I think that it is better to focus more on the data we get from the daily chart:

  • 77 is a weekly resistance zone (and therefore a potential Sell Zone)
  • The Fast MA line is what stands between AUDUSD and 0.75-0.76 (nearest support).

I’m pretty sure that we will see false breakouts on both directions but the key guidelines is – As long as AUDUSD remains below 0.77 it offers shorting opportunities. The confirmation will be given only if AUDUSD will break and close below the Fast MA line (will trigger the rising Wedge pattern mentioned above).

If you are extremely bullish, you can try and trade AUDUSD higher based on these guidelines:

  • AUDUSD remains above the Fast MA line (aggressive entry – supported by the short term bullish harmonic scenario described above).
  • AUDUSD break and close above 0.78.

That’s it for this week.

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Strategy Of The Week – 02/20/2017

Strategy of the week – AUDCHF

This week’s strategy of the week will focus on AUDCHF that perhaps is on the verge of a major weekly move.

AUDCHF – Correlations

AUDCHF mostly reacts to price action from these two pairs – AUDUSD and USDCHF

The chart above shows the correlation between AUDCHF (Candlesticks chart) and AUDUSD (pink line).

You can clearly see how AUDCHF correlates beautifully with AUDUSD. In fact, AUDCHF weekly downtrend (started at 2012) was mostly influenced by a series of rate cuts by RBA.

In the middle of 2015, the bearish pressure from RBA stopped and since then AUDCHF has been rising thanks to a recovery in AUDUSD’s price (see the correlation)… and also thanks to USDCHF that rose from 0.93 to 1.0 and pulled most of the CHF pairs higher with it.

 

It is important to understand that when you decide to trade Cross Pairs, like AUDCHF for example, it is better to pay attention not only to the specific pair’s chart, but also to the charts of the powers behind it (you’ll need to do some correlations analysis for that)

Let’s look at USDCHF for example:

USDCHF price is in the middle of a bearish correction wave that started when this pair completed two harmonic patterns, about two months ago.

This correction wave probably isn’t over yet and has the potential to reach USDCHF’s weekly uptrend line.

Now that you understand that USDCHF is only in a correction wave, would you consider taking a longer term bearish position on AUDCHF? Probably not…

Such decision can make sense only if you anticipate a very strong bearish move in AUD pairs because of some fundamental reason (more rate cuts by RBA for example)…Or a very strong move of the CHF currency (SNB has quite a record of market intervention!)

As technicians we do not forecast fundamental moves and therefore we need to understand the environment we are trading and adjust our target accordingly.

 

*Notice – The correlations with USDCHF and AUDUSD, along with the weekly chart analysis that you’ll see below show a potential for a bullish breakout. That is why it is important for me to clarify that the bearish scenarios that I’ll describe below are short term bearish scenarios and counter trend setups. You need to consider this as a risk factor and adjust your risk management plan accordingly if you will decide to trade one of the scenarios mentioned below!

 

 

Weekly Breakout?

Starting with the weekly chart analysis:

The weekly chart shows us that during the first quarter of 2016, AUDCHF finally broke out of its weekly downtrend line. The successful breakout was confirmed few weeks after when AUDCHF bounced from the broken trend line and confirmed the support of the new weekly uptrend line.

Notice how the MA lines (50 and Fast MA line) have started to act as supporting lines? That’s a sign of a bullish trend.

The bulls kept knocking on the 0.75-0.76 resistance zone for about a year till finally, two weeks ago, they managed to push the price above that zone and generate a breakout.

But that breakout move was limited – The 200 weeks MA line was waiting right around the corner and indeed the price felt its pressure last week and formed a weekly Doji.

The 200 weeks MA line isn’t something that you want to bet against… not if you are a careful and responsible trader. That is why Buying AUDCHF below the 200 weeks MA line is a pure gamble while Selling AUDCHF below the 200 weeks MA line is a reasonable speculation

If you want to trade the weekly breakout you should probably:

  1. Wait to see that 0.75-0.76 turns to support (breakout confirmation)
  2. Look to buy AUDCHF from stronger support zones (like 0.75 for example)
  3. Wait for the price to break above the 200 MA line, confirm the breakout and then use a pullback to go long.

Daily chart analysis – Short term bearish scenarios

As I explained above, buying AUDCHF at current price level doesn’t make sense.

Instead, perhaps the 200 weeks MA line that already proved as resistance last week can be used to find short term bearish opportunities that can be traded (trading the blue pullback arrow shown above)

The daily chart provides us two potential bearish scenarios:

  • Price Action – Outside Bar and the top of a trading channel (blue dashed lines)
  • Harmonics – Bearish AB=CD pattern

The Outside Bar scenario

Outside Bars are Price Action patterns that need to be triggered by the following candle.

In our case, in order for the Outside Bar to turn to a bearish reversal pattern, the price must close below the Outside Bar low. That almost happened last week when the price spiked below the Outside Bar low, but didn’t close below it!

The trading scenario I’m showing above requires the price to decline back below the Outside Bar low and trigger the reversal pattern. In such case, the stop loss should be above the Outside Bar high and my final target zone for this setup is the bottom of the channel and the 50 MA line.

*Aggressive traders can try and find some intra-day levels within the Outside Bar’s body (like a 61.8 Fibonacci retracement for example) that will allow them to Sell AUDCHF from higher levels.
The pros with this approach are the tighter stop loss and the better R/R
The cons are that the entry is without the trigger that turns the Outside Bar to a reversal pattern.

 

 

 

The harmonics scenario

The harmonics scenario that you can see below suggests that AUDCHF price may continue a bit higher and even spend some time above the 200 weeks MA line.

In this scenario what we don’t want to see is a close above the 200 MA line. Instead what we want to see is a spike above the 200 weeks MA that will follow with a quick decline and a close below resistance – That will generate a False Breakout signal.

The entry zone here is near 0.78.

The pattern’s PRZ is above 0.78 but it is better to be cautious and wait to see some reversal patterns inside the PRZ that will drive the price back below 0.78.

I’ve marked 0.76 as my target zone for this setup but the first thing you should look for is a close below the 200 MA line and below the trading channel’s top (perhaps you can set those as short term target zones in which you take and protect your profits).

The 100 pips stop loss I used in this example allows the price some breathing space inside the pattern’s PRZ and still provides a R/R of 2.

Few words about False Breakouts

There’s no reason to be afraid of false breakouts.

Newbies fear them, they don’t know how to handle them. Pros know how to exploit them.

It is very common to see false breakouts near high importance lines such as the 200 weeks MA line:

The example above (also AUDCHF weekly chart) shows multiple bullish opportunities that were created following false breakouts between 2006 and 2008.

As long as you understand the dynamics of false breakouts and you know how to properly manage your risks in such scenarios, you can definitely trade them.

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