Thursday, November 12, 2009

EURUSD—Are we going anywhere yet?

If blustering is the art of making loud, empty threats, the Euro seems to have it down pat. Once it touched 1.5048 yesterday, the bulls were psyched and those who thought the top was 1.5063 were, if not quaking, clearing their throats and making noises along the lines of maybe the correction was going to take a bit longer. Then, as Emeril says, Bam! Two long, black candles on the three hour chart took price down to 1.4954. OK! Perhaps the bears were right, after all. Re-establish shorts. And up she goes, touching 1.4979 before sagging to 1.4927 early this morning. My long trade stopped out at plus ten pips during this bouncing around. And it’s not as though these moves are leading to serious pips. What is going on? More important, where do you place your trades?

A look at the three-hour chart shows the pair is in what could turn out to be a broadening pattern in classical technical analysis (TA) speak (should break downward) or an expanding triangle in Elliott Wave (EW) speech (should break up). Pick your poison.

This is what makes TA so damn hard, right? What is the pair going to do? And, by the way, could it just do it? Get it over with?

But this is the way trading is. Traders go back and forth, prices go up and down, dust is stirred up but there’s no definitive move. We just have to wait it out. So let’s look closer at the chart.

You can see the possible broadening pattern, a sign the market is undecided. We need five reversal points before it completes. At this point four are in place (1.5021 down to 1.4930, up to 1.5048, and down to 1.4927 on the three-hour candle that just closed). Ideally, there’s a Fibonacci relationship among the touch points--.618, .786, 1.0, 1.272, and 1.618. After point five one should see a general decline and it should never again exceed point five. So you’d short. But if the pattern fails you’d want to immediately look for an entry in the direction of the failure, in this case a buy. Flexibility is the key.

If it’s an EW triangle during some sort of funky correction, then you’d expect prices to break upward. There’d also be five touch points within the triangle, but whereas the broadening pattern uses the top of 1.5021 as the starting point, EW would use the first touch down at 1.4930 as the starting point. In both cases the next move would be up.

Momentum, as seen in RSI, is holding at bullish levels so far. But, the last time RSI was at this level, price was higher so that in itself reflects a loss of momentum. My bias is to short rallies

Here’s the three hour chart.

© 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.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.

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