Monday, December 7, 2009

EURUSD—Narrow range for now

Now that there’s been a bit of a drop, the pair is malingering, up, down, up, down, in a narrow 50-pip range for the last several hours, trying to find a direction. This is to say, traders are malingering, trying to figure out what next. Even if the pair begins to climb again, it needed this correction, if that turns out to be what it is.

Before believing that this is the beginning of a big plunge down, it’s helpful, I think, to look at a point and figure (P&F) chart of action on a 3-hour basis. Whereas in normal price charts, the passage of time causes change, in P&F charting, the chart doesn’t change unless price changes by some predetermined amount. This cleans up the picture of supply and demand and reduces “noise” on the chart. When looking at this chart, the column of X’s represents buying or demand; the column of 0’s represents selling or supply. The other reason I like these types of charts is that they tend to mute price extremes (which are also a form of noise in the market), if they’re constructed using close prices. For example, while the Euro reached a high of 1.5144 recently, this chart shows only that it exceeded 1.5080 since it didn’t close above that amount on a 3-hour basis. By varying the box size, you can make the charts more or less sensitive. You can also construct them on a high/low basis.

The chart shows that on a three-hour basis, price is still above the 45° trend line that began in March. Price would have to close below 1.46 for this trend line to be penetrated. A close below 1.4540 would break below the horizontal support line of this consolidation area. Until these lines are broken, it’s reasonable to assume the trend is still up. Here’s the chart:

Compare the P&F chart to a candlestick chart. My charting packages don’t go back to March on a 3-hour basis so obviously there is less history within which to place the current move into context. As a result, it looks as though the trend has changed since you have lower highs and lower lows, as well as a break of a trend line from a bullish channel. Note, too, there’s a bit of hidden divergence. This is usually negative and suggests the downtrend will continue.

Two more points about the Euro:

1) On the daily chart, the pair has fallen beneath the daily uptrend line from March (currently at 1.4814) and touched a low of 1.4757. However, it has not closed below the line and, until it does, we can’t really say it’s broken.
2) On the weekly chart, the 55 EMA is at 1.4757. As I’ve pointed out in the past, this EMA has served as support on several occasions and it’s the first time it has touched it since early November.

© 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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