Waiting it out

AUD/USD
Can the market move any slower? Well, yes, I guess it could. My long that I entered yesterday at .8570 has gone up as much as 70 pips but has now fallen back.

I closed half my position at 50 pips and have moved my stop to breakeven. It’s either going to make it up to the top of the range or it won’t. It’s like watching paint dry. But little has changed since my analysis so there’s no reason to do anything else but wait. This situation won’t last forever.

EURUSD

I was stopped out yesterday on the brief move to 1.4653. After looking at the price action on the 15 minute chart I decided to short again. I entered at 1.4632. What made me do so? Remember, I had lightened up on my short position yesterday because of overall bullish sentiment, a slight expansion on the hourly chart, and the fact of triple witching this week which traditionally has resulted in a positive week for the Euro.

Look at the candles on the 15 minute chart below. The upper shadows were long, suggesting that the higher price was being rejected. A gravestone doji formed. This was bearish. The price had rallied, yes, but was dragged down to the low of the 15 minute session. Steve Nison wrote in his book that “the gravestone doji represents the gravestone of the bulls that have died defending their territory.” (Japanese Candlestick Charting Techniques, 2001). There was also divergence between price and RSI. The small triangle represents my entry.

As with the Ozzie, price will not stay in this narrow range forever. Yesterday afternoon I plotted out my interpretation of the Elliott waves on a daily Euro chart which is below. I don’t consider Elliott Wave Theory (EWT) tradable in and of itself but I do believe one can gain insight into the market by looking at it from this viewpoint. The problem of course is that if you have five EWT analysts in a room you usually have six interpretations. One reason this is true is because of the nature of corrections—it’s often hard to see them until well after the fact.

My interpretation is that we’re in a correction known as a zigzag. This is a three wave correction (ABC). EWT involves rules (which are inviolate) and guidelines. The rules for a zigzag are simple and are found in Frost and Prechter’s book, Elliott Wave Principle. First, it always subdivides into 3 waves. I think wave C is forming now, making it the third wave. Second, wave B always subdivides into a ZZ, flat, triangle, or combination thereof. That’s pretty broad, guys, but what I’m labeling B conforms to this. Third, wave B never moves beyond start of wave A which it did not. Finally, wave C always subdivides into an impulse or diagonal. An impulse is five waves up which I’ve labeled with 1 being in March of this year at 1.3740. So, by this interpretation, we’re in the fifth wave up.

Now the question is where might it end? Ha! That’s always the question.

The guidelines for zigzags say wave C is often about the same length as A and usually ends beyond end of wave A. If this is true then we could expect it to end above 1.4720 which is where wave A ended in December of last year. Another guideline says that a line connecting waves A and C is often parallel to a line connecting the end of wave B and the start of wave A. If that’s true then again we’re looking at about 1.4720.
I could buy all this but I think even if it’s true that there is some serious sideways action going on in the Euro (in most pairs actually) and one can make a few pips while it works itself out.

Frost and Prechter also write about the Golden Section. The golden section has to do with how you divide a total length of something. It’s applied to wave theory in that the distance between the start of wave 1 and the bottom of wave 4 will be either .618 or .382 of the whole. You can decide which one by observing how wave five behaves. You need to know whether wave 5 “extends” or not. This is where EWT makes me grind my teeth and clench my jaw. If I have to wait until the end of wave 5 the first question is how will I know it has ended? But never mind that.

I’m going to make an assumption both ways and see what it gets me. If I decide that the distance from the bottom of wave 1 at 1.2456 to the bottom of wave 4 at about 1.38 is only .382 of the whole length, well you can see that the Euro could go up rather sharply to about 1.73. That would be interesting, for sure. If I make the opposite assumption—that .618 of the entire move had already occurred at around 1.38 then the entire move would end at 1.4663. This to me seems very reasonable especially combined with the wishy-washy way the pair has been behaving.

You could say this entire correction isn’t a zigzag at all but a flat. But I’m not going there. For one thing, I have a life to lead. Also, there are other pairs I want to look at.

Remember where I’m at right now. I entered at the top of this little range with a tight stop so the worst that can happen is that I’ll take a small loss. If I take that loss the market is telling me something important and I’ll have better information to base the next trade upon. I can also move to breakeven as it hits the lower part of the range so I’ll have no loss at all if taken out.

GBP/JPY

Yesterday I also want long GBP/JPY. I’ve moved my stop to 60 pips profit. This was a straightforward buy at support after a steep fall. It’s as simple as falling off a log, not that I’ve ever actually fallen off a log. It’s my favorite kind of trade—very small risk because you can set a tight stop and good upside potential. To be honest it’s probably time to start looking at shorting it but I’ll keep you posted. Ranging, sideways markets seem to be the rule right now.

EUR/GBP

Finally, I think the EUR/GBP is interesting. Take a look at my 3 hour, 3 box Point and Figure chart. It consolidated tightly and had a simple quadruple top before breaking out. The many small columns tell me there could be accumulation taking place. It now has drifted back near the breakout point. I’ll study this one further and keep you posted. None of the above is a trade recommendation. All my analysis may well be wrong, wrong, wrong. Trading carries a substantial degree of risk.

© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.