AUDUSD broke .9000--hip, hip, hip, hooray

AUDUSD finally made it above .9000! Big cheers all around as it reached an overnight high of .9046. I had a tiny long that hit profit at .9004. Given all the huffing and puffing to get to this level, I’d expect it to fall back a bit, perhaps to the .8800 level or just below. At that point, my calculations indicate it could go higher—possibly .9160, up to .9480 then .9520. None of this is guaranteed, of course. It still hasn’t worked out its negative divergence on the daily chart. Divergence is all over the place these days and it’s not a great sign.

Here’s the hourly point and figure (P&F) chart which is remarkable only for the clear patterns it built on the way up—climb, consolidate, climb, consolidate. It needs to fall below at least the internal trend line before anyone gets too bearish.

Equity futures are bidding up this morning as of 7AM EST. Might be a bad day for the buck.

© 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.

Thursday morning trades, canoodling with EW Theory, and other thoughts

GBPUSD

Yesterday's short trade is still on. I took a third off the table earlier and have my stop at plus 60 pips. I may move it again soon. I also took another short position earlier this morning and have the stop at breakeven. Note on the three hour chart below how RSI respected its Fib levels. The horizontal orange lines are why I said yesterday I wanted to short around 1.6150. I explained yesterday that I shorted under that because of price behavior. The thing to watch now, in my mind, is how the pair begins to behave as it nears the short uptrend line. Here’s the 3-hour chart but I’ll be watching shorter time frames.
USDCHF

My short was obviously taken out yesterday morning at profit. I entered long on the pullback where it continues to do well. But it’s nearing the top of that channel I’ve shown on prior charts so I need to assess this.

EURUSD

I got in and out of a quick short yesterday. I’m carefully analyzing the recent price activity. My “belief” is that the pair is headed down but you know how beliefs can blind you to what’s really happening? A good price analysis will tell the story.

AUDUSD

Yesterday I wrote that I was out of the Ozzie until I could form a clearer picture. I hypothesized that perhaps we could be in some sort of B wave (Elliott wave speak for corrective waves that are often choppy and difficult to decipher).

I’m not a big fan of the Elliott Wave Theory (EWT) for actual trading because it’s difficult to use it for trades by itself (although I know some people do and more power to them if it is profitable for them). I do, though, count waves. I do spend oodles of time canoodling with my Elliott Wave Principle book (Frost and Prechter).

Why does EWT appear so difficult? Why is it that there are so many interpretations? One reason is that while there are several rules—and these are inviolate—there are many more guidelines. These are just that—guidelines. The guidelines lead to arguments among EWT practitioners. Another reason is that many so-called EWT practitioners don’t seem to have memorized the rules and say things that simply aren’t true. A third reason, as I’ve mentioned before, is that the corrections are devilishly difficult to identify until well after the fact as to what they are and what they mean. While they’re in process they can lead to some strong arguments among practitioners.

Arguing over interpretations of anything on the charts is a valid activity. After all, if one person or theory held the absolute answer then that would be the fountain of youth, Eldorado, and the lost city of Atlantis rolled into one. Wouldn’t all who practiced that theory be lucky? But people that hold strongly to any given theory get extreme in their arguments, often using emotion where reason fails. So you hear such phrases as “I have this on absolute authority from a close relative of Elliott himself who verified it had never been written down and therefore I’m right and you’re not and you’re also stupid.”

Where I find EWT most useful is in gauging market psychology. It supplements my other analysis. I won’t necessarily act on a wave count that seems to be present if it goes against other factors I consider more important.

Briefly, since I don’t have the time to write a treatise on the topic, certain waves are technically strong and have real oomph. Others are not strong at all. Often, such as the B wave I mentioned as a possibility yesterday, they exhibit divergences, non-confirmations and the like.

Getting back to the AUDUSD, I studied charts dating back 30 years yesterday, in an attempt to clear up my confusion over what the pair was doing. I can make a case for three alternative wave counts based on the monthly chart. This is not helpful. One can’t trade this. But it’s a good exercise to write down the reasons for each. Briefly, though, my favored wave count is that we’re in a primary wave two correction (wave one being the steep drop from July, 2008). If this is true then it could retrace most or all of wave one. So it can’t exceed .9851. Since its high yesterday was .8860, this isn’t helpful, either. At least not to me, a small trader, who is not going to buy now, damn the torpedoes, and put a stop quite a distance away. I can make a good case for why I should have gone long at .8590 and stayed in. Had I done that I wouldn’t be doing all this work right now. I didn’t buy but should have doesn’t cut it in trading. Or anywhere else.

So I need to work on a smaller chart, right? Yes. But before leaving the monthly chart I drew an uptrend line from the lows earlier in the decade and it is coming in right about where the pair traded yesterday. Sometimes these old trend lines, once violated, serve as resistance. If I draw a horizontal line back in time to the early 80s on the monthly chart, I also see this is an interesting area known as polarity. Price has roughly used it for support and resistance.

Is it worth a short then? Well this would tie in with my belief we might be in a B wave correction. But there’s a bit of cognitive dissonance here. I’ve been calculating resistance ever since the secondary low in November, 2008. At each key resistance level I dutifully lightened or closed my longs, only to have to find a way to get back in. I’ve been trying to go long since the beginning of September and had some decent trades, e.g. one at 90 pips, but, for the last couple of weeks, have only found short setups where I’ve made small amounts of pips or taken small losses. (I’m not trashing 20 pip profits—they can add up—but one hopes for better than that, usually).

Here’s my opinion. It’s in an uptrend although it seems to be struggling with robust, sustained up moves. It’s at a resistance level that held once, yesterday. I may short it if it reaches .8860 again, depending on the behavior on the charts. Or I may go long if I can find behavior to support that position. That’s the best I can do at this point. Wait and see.

None of the above are trade recommendations. Remember that trading involves substantial 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.

Uncertainty

AUDUSD—standing aside for now

I’ve been a bit buffeted by the Ozzie during the last several days. I’ve been out at breakeven or tiny little profits in its sideways movements. I stopped out overnight at .8770 with a loss of 48 pips. This morning I took a closer look.

From the longer term charts—monthly, weekly, and daily—we’re still in an uptrend although the movement has been strongly sideways the last couple of weeks. Lately it’s been waffling with ranges, false or premature breakouts from ranges, negative divergences, etc. Now it looks as though it may be pushing up which is what I thought it would do in the first place.

Why, I ask myself, would a pair behave this way? I mean besides the obvious reason that nobody can make up their mind about what to do—is the sky falling or is it not? Maybe that is the reason but what else comes to mind? I think about what Frost and Prechter wrote in their book, Elliott Wave Principle (New Classics Library, 10th ed. 2005), about B waves on page 81:

B waves are phonies…sucker plays, bull traps, speculators’ paradise….[They’re] rarely technically strong, and are virtually always doomed to complete retracement by wave C. If the analyst can easily say to himself, “There’s something wrong with this market,” chances are it’s a B wave.

That’s what I’ve been thinking to myself—there’s something wrong with this market. Of course there may be something wrong with me and my analysis but I’m not going there right now.

OK. What do I have? A belief we’re in an uptrend although Dow Theory tells me it could be an intermediate correction. A market that seems unclear. What choice do I have? I can only stand aside. As Gann wrote, if you “don’t know what to do, there is but one thing to do. Get out and wait until you know there is a definite trend.” When I see something more clearly and have a good entry point, I’ll trade it.

USD/CHF

I’m out of this pair I bought at 1.0288 and have a short on from near the top of the channel at 1.0386. Remember that yesterday I wrote it could bump its head and scoot back to its lower trend line? Well it did. Look at the candles as it approached the top of the channel on the hourly chart:
Now it’s falling out of its channel. Is this a fake move prior to all the news today? (ADP, GDP, Corporate Profits, and CPI). Look at how RSI is dipping. Note the negative divergence. All this is not good. I am, after all, in an overall downtrend as I pointed out yesterday. I’m uncertain here, too, but will stay in the trade until I’m stopped out at profit. Hmm. There seems to be a theme of uncertainty this morning.

EURUSD

I stopped out overnight with 100 pips profit. Not bad, but what’s up with the Euro? I’m analyzing it now and will post later. Hopefully I won’t have to say I’m uncertain, LOL.

GBPUSD

Thank goodness I don’t have to say I’m uncertain! Alas, there’s no trade at the moment. I consider the market to be contracting and I’m waiting to sell, hopefully at or above 1.6150. I’ll post more, later.

None of the above is a trade recommendation. These are just my early morning thoughts. Remember that trading involves substantial 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.

Observation, Generalization, Verification--Euro and other trades

I’m still short the Euro from the sell order that was triggered last Friday at 1.4712. I moved my stop to 100 pips profit if taken out. In addition, I this moment (10AM EST) took a third of my position off the table at 170 pips profit.

I wondered yesterday if I’d see another push up in the Euro. It hasn’t happened yet. One can see a few reasons for being short this pair. Some of them (from the three hour chart below) are:

1) It broke below an uptrend channel (on daily as well as the 3- hour)
2) There was prior divergence between the RSI and the upward movement in price
3) The 1.47 area was proving to be resistance
4) It broke below trough (1.4723) of a double top on the 3-hour chart
5) Long bearish candles were taking out small bullish candles

Some might argue a Head and Shoulder (H&S) pattern was forming on the three hour. If so, it’s a bit messy. More important is that it’s currently loitering just below the neckline. Until that’s definitively broken, there is no pattern. This is something new traders often forget. “Double top!” they’ll say, or “Head and Shoulders!” They correctly detect the beginnings of the pattern but don’t wait until it proves itself to be really that. Good observation of the possible but too much generalization and no verification. Trading is a matter of patience (forbearance, I wrote earlier this month).

But there is enough here to say, in short, a short. If it continues down and definitively breaks the upward channel on the weekly chart this could be the beginning of something big. Before one starts counting profits, though, note the three hour bullish divergence on the three hour chart. We’ll just have to continue watching. Here’s the three hour chart:

By the way, most will realize that as far as correlation goes this is a mirror of my long USD/CHF trade. I could have doubled up in either instead of trading them both. The important point, though, is that I realized this as I calculated position size for each trade.

Last week I wrote that I shorted the AUD/USD at .8738. It stopped yesterday at 20 pips profit. Talk about sideways movement. I shorted again at .8722. As soon as I finish writing this I’m going to analyze this again. This is how I spend my days as a trader. Analyzing and re-analyzing price movement from several different points of view. When I first started trading I heard many stories about how people would trade from the beach, grabbing 500 pips here or a thousand pips there. It hasn’t proven to be the reality for me. I have to work at this stuff.

The GBP/USD has had its fun with me, stopping me out yet again at break even. Talk about the need for more analysis. I’m also out of GBP/JPY.

None of the above is a trade recommendation. You have to develop your own ideas. I only hope to show some of the tools I use that can help you do so. Remember that trading involves substantial risk. Get written permission from Mommy before you attempt it but only if you and Mommy have a good financial cushion and are risking money you can afford to lose.

© 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.

Monday morning in the Ozzie

Last week I wrote that I shorted the AUD/USD at .8738. I’m still short. After hitting a low this morning of .8587 it’s back up a bit. Currently I’m at 94 pips profit as I write this. I’ve moved my stop to keep 20 of those pips. I may move it closer depending on how the pair behaves in the next hour or so. It’s well back into the consolidation range I wrote about extensively in the past couple of weeks. 45°

Here’s my one-hour, three box point and figure (P&F) chart. Notice the simple triple top it broke on its ascent. It could head back to that level before it resumes its climb. That would make a nice profit target of .8480 to .8520. What’s important to remember is that the pair remains technically in an overall uptrend that began in March. If the pair violates the trend lines I’ll be happier being short in this pair (actually very happy). But until that happens, I’m thinking reaction in an uptrend. That doesn’t mean you can’t make money from going counter to the trend. It does mean you have to be alert and not get all gaga over the trade. Now that I think about it, never get all gaga over a trade.

As always, this isn't a trading recommendation in any way. Trading Forex, or anything I guess, involves substantial risk and is not for the faint of heart.

© 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.

Is it really Friday?

First, a word cloud based on the text of the FOMC minutes from Wednesday. I hope you had a chance to read the lighthearted take on the minutes I posted a couple of posts ago. This word cloud tells me that their most frequently used words are federal, committee, economic, and markets. Why am I not surprised?

I’m still in the AUD/USD (currently at 78 pips) and USD/CHF (currently at 38 pips) trades from yesterday. The USD/JPY trade stopped out at 20 pips profit. GBP/JPY stopped out at a 40 pip loss and I’m currently short in this pair with my stop at breakeven. Since the AUD/USD and USD/CHF both have stops at a profit point and the GBP/JPY is at breakeven they are “free” trades. Traders love those things because once the stop is at or above breakeven you can't lose money or are profitable. But I’m in these trades thinking bigger things could happen. Whether they will or not is the question.

Today began looking like one of those days when the USD could continue to strengthen. Why? Equity futures are bidding down. Plus there’s lots of buzz and chatter out there about how the equity markets have seen their highs and a turning point is here. Of course some of those buzzing have been saying this for at least six weeks or so, some longer. Much in the area of market prediction is downright silly. That said, I do believe the market provides clues and markers for those alert to them. Seeing them requires awareness, something I’ll write about this weekend.

Ten days ago I did an Elliott wave count on the EUR/USD. I’ve updated it in the daily chart below. The trouble with Elliott Wave is that when you’re in a correction it’s difficult to reach agreement on what it is until after the fact. This makes it less than tradable in most cases. But I do believe it reflects a market psychology. I still believe we’re in wave C of a correction on the daily chart. Once the Euro reached past 1.4720 I put a sell order in at 1.4849. My thinking was that it would reach towards its September ’08 high of 1.4868. It climbed only to 1.4845 so it didn’t quite reach the order. Frankly, I’m a bit surprised. A sell order I put in place this morning at 1.4712 was just triggered. I’ll move my stop to breakeven (if possible—it can reverse quickly but it’s a tight stop so I won’t pay too stiff a price) as soon as it looks as though it’s going to continue down. I won’t be troubled if I’m taken out since there may be one last push up. In any case, the pair is looking a bit top heavy.

Besides that I went long the pound this morning at 1.5987. I don’t have time to include the chart right now but I have a tight stop on it.

None of the above are trade recommendations. Remember that trading involves substantial risk. My hope is that by posting this analysis on some of the trades I take, people can start to learn an approach for themselves. The biggest part of trading is handling emotions and this is something I'll be dealing with in future posts.

© 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.

Thursday (9/24) trades

AUD/USD

I was stopped out of my Ozzie long yesterday. This morning, after studying the charts, I decided to short it. I know; I know. It sounds as though I’m waffling on this pair—mostly long but now short? What’s up with that?

Well here’s the thing. While the pair is in an overall uptrend, it’s waffling too. It had that lovely consolidation range (.8543 - .8676) from early September until last week when it broke out, pulled back, and broke out again. One premature or false breakout I’ll accept. Two and I begin to get suspicious. It’s back inside its range (a peek a moment ago showed .8627).

I decided to short because:

1) Two upper candle shadows reached .8788 and then fell back (This later became a double top because it broke below the lowest low between the two tops (in this case .8703) but I didn’t know that when I placed my short trade at .8738.) I was more concerned with the upper shadows that meant higher prices were being rejected.
2) The strong black candle that happened before the last little uptrend. This showed me selling pressure was coming in at that level so when price returned to that level I thought it might happen again.
3) The pair was stumbling at the same price it had stumbled at on the first breakout
4) There’s still negative divergence on the chart between price and RSI

Since then of course, there has been confirmation of the double top. A calculation of what the price objective could be based on that would be .8616. It reached that point so I lightened my short by a third to take some profit and moved my stop to a small profit stop. When it reached 100 pips profit I took another third off the table. If it definitively breaks the trend line from mid-September (it’s already broken the one from the beginning of the month), I suspect it will at least return to the bottom of its range. Maybe more. Last week I wrote that I believe the .8500 levels are significant and that the pair could have big moves in either direction it took itself to. I still believe that. Here’s the 3-hour chart (the little downward triangle is my short entry):

USD/CHF

When people pile on against the USD they really pile on. It’s been in a whale of a downtrend. I wrote last week that there had to be a dead cat bounce in there somewhere. This morning I took a long position which is currently up 75 pips but I’m not picking out any Prada’s with my profits just yet. The equity market needs to start dropping for me to feel comfortable this is going to run. Will it? Some people think so. Reasons I took the trade were:

1) The lower shadows showed the market was rejecting those lower prices
2) Positive divergence between price and RSI on the 3-hour chart
3) It took four candles to get to the low of the prior long white candle on the 3-hour chart
4) I was at a support point so I could go long with little risk

In addition, some other calculations I do suggest it might be bottoming. Bottoming is usually a process, though, and not an event. So this pair could stammer and stagger a while. Here’s the three hour chart:

OTHER TRADES

I went long USD/JPY this morning. I’m not going to go into all the reasons right now except that it’s obvious it was at support and I could enter with a small stop. I’ve moved my stop to a small profit. I also went long the GBP/JPY because it was at an obvious support. That trade has been slightly up or slightly down all day. I’m watching it. Remember it’s in an overall downtrend and it’s always safer to sell rallies. But we’ll see. As I’ve written before, one mustn’t get married to a point of view. That means I can reverse if I find evidence to do so.

None of the above is a trade recommendation of course. Remember that trading involves substantial 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.

Out of the Guppie

Well, finally out of GBP/JPY at 90 pips profit. I have a small long in the AUD/USD but am staying out of trading until after the US rate decision this afternoon. Not that I expect any great news there but the markets are acting a bit squirrelly in my opinion. More to the point is that I'm traveling back to Florida this morning and can't give the trading the attention it deserves.

Ozzie and Guppy

You go, Ozzie! That’s what I feel like saying to this pair since it has broken out of its range yet again with a nice looking candle. But will it go? One encouraging sign is that it didn’t fall all the way back to the bottom of the consolidation range—it stopped well short of it which is bullish. The candles up since that point have been strong ones until the bearish piercing one that just completed. Note that it’s near the point where it fell back before some caution is warranted. It broke out overnight and in the early morning hours when I was sleeping so I didn’t take the trade on the breakout. What I’ll do now is see how it acts around this period before jumping in one way or the other. As I pointed out yesterday we’re still in an uptrend (since March) so the bias is to the long side. Here’s the three hour chart:

As far as the Guppy goes (GBP/JPY) it’s stuck in a small range as it tries to find its direction. In the chart below look at the beautiful symmetry of the moves and note that the second move up didn’t go as far as the length of the first one (I’ve marked the moves up with purple lines). I’m somewhat fanatical about proportion and symmetry because the market seems drawn to it as well. I’m still short in the pair (the tiny triangle marks where I took my short at 150.49). At this moment it’s at 135 pips profit. I still have my stop at a profit point of 80 pips at 149.69 and its high yesterday was 149.62 so that was a good stop. I may move it down a bit more since its high today so far has been 149.43. Whatever this pair now does, we know an important thing about it and that is that this narrow range of 148.06 (the low since I shorted it) to 150.49 is meaningful in some way. Otherwise it wouldn’t be hanging here. More to come. Note also how it rejects lower prices with long candle shadows in the past. It's not showing these here but that's not infallible. You have to combine things such as candles with support and resistance and other indicators before making decisions.

This is a frustrating week for me as a trader. Other committments keep demanding attention and I'm spending little time with the charts. But that's part of life and I'll be able to get back to it soon.

None of these are trade recommendations and trading involves substantial risk.

©Dianne L. Fecteau. No part of this can be excerpted without the author’s specific written permission.

Watching AUD/USD

The AUD/USD started weakening a bit at the end of last week after it broke up from its consolidation range earlier in the week. As of just a moment ago the buy price was .8622 so it’s back inside the range of .8543 to .8676. Remember that I wrote that breakouts from ranges, in particular, can be premature or false. There’s no way of telling right now what the real story is with this pair. Here’s the 3-hour chart showing weakness—it violated the 62 EMA it had been roughly using as an uptrend line plus the uptrend line I drew on the chart. It also violated the RSI uptrend line.
None of this weakness means the sky is falling. But it does indicate some uncertainly. So, I have to do what most traders need to do if they’re going to be successful. I have to wait until I get some more clues. Meanwhile I canceled the remaining buy order I had in place, was stopped out of the long I had from .8723, and bailed out of the filled buy order at .8678. So I’m flat. I bailed because I don’t like the weakness it’s showing and don’t have enough positive clues to wait it out as I did when I wrote about the GBP/JPY last week (a trade I’m still in by the way; I’ve set my profit stop at 80 pips)
Overall, it’s important to remember that we’re still in an uptrend and have been so since March. That’s six months. It could be just an intermediate uptrend (according to DOW theory) before a downtrend resumes. So this could be the resumption of the downtrend but I don’t have proof of that or even any overwhelming evidence that would let me assume it to be true.
What clues will I look for that will shape my opinion of the pair at this point?
First, I still believe the consolidation range is important. That means if it breaks upward again from that range I will take another long position. I may try a tiny long if it falls to the bottom of that range as well with an extremely tight stop. There’s also an uptrend line from the daily chart coming in at .8475 so that area is significant. But if it definitively closes below the bottom of the range and the uptrend line I would start to think the trend has changed and would be looking to sell on rallies.
For the time being I have to wait and see.

Thursday AM - AUDUSD

Yesterday I wrote that I was waiting for a pullback to enter Ozzie. I set up two buy orders (one at .8678 (just above its consolidation range) and the other well back within the range. Neither was hit although it came within a couple of pips of the first one. Had I not been at an appointment yesterday when that happened I might have bought there anyway but there you go. You can’t always be at the monitor. Some trades will get away. There will always be another. You can see this on the three hour chart: below.

I believe it might return to its range, at least the top, but on the 15 minute chat below, I just this minute put on a small long at the minor support of .8720 (filled at .8723). I personally would love to see it return to its uptrend line I wrote about yesterday even though I’d be stopped out. This was the .8587 point yesterday which is now .8621. Here’s the 15 minute chart:

None of the above is a trade recommendation. This blog only reflects my thougts and analysis for myself. Remember that trading involves substantial 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.

Will I get back in AUD/USD?

As I wrote in the last post, my profit target in the Ozzie was hit overnight. This morning the pair reached a high of .8729, a high not seen since the summer of 2008. Now I’m wondering how and when I can get back into the pair. I’ve posted the three hour chart below.

Remember that the consolidation range was.8543 to .8676. I pointed out in my post on Monday that false and premature breakouts are not uncommon with rectangles. One obvious strategy is to wait to see if the price goes back to .8676. I’d then go long with a tight stop. This approach requires watching the price action carefully at the time it approaches that price. Carefully, means I’d look for bullish signs before jumping in. Another entry point, assuming the breakout was premature, is to wait until it reaches the three-hour uptrend line which is also at the point of the 62 EMA. This is at .8587 now but of course that could change a bit by time price gets back to it.

There is bearish divergence between price and RSI right now. I need to watch that, too. Here’s the three hour chart:

As usual, I’ll just have to continue to study price action.

None of the above is a trade recommendation of course. Remember that trading involves substantial 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.

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.

AUD/USD

Last Thursday I went long the AUD/USD at .8586. I moved my stop Friday to .8596 and was taken out last night during the Asian session at that price. I just went long again at .8570 so I’m in at a slightly better price than the last trade. Had I not been mucking about with the Euro charts for so long or not gone for a cup of coffee I might have noticed when it hit the near bottom of the range but there you go.

One thing I won’t do in this blog is hypothesize about possible trades. Lots of people put out a lot of analysis that has nothing to do with whether or not they’re really trading. Jessie Livermore tells the story of a guy who was going to fight a dual the next day (Reminiscences of a Stock Operator, page 27).

His second asked him, “Are you a good shot?”
Well, said the dualist, “I can snap the stem of a wineglass at twenty paces,” and he looked modest.
“That’s all very well,” said the unimpressed second. “But can you snap the stem of the wineglass while the wineglass is pointing a loaded pistol straight at your heart?”

Like Jessie, I need to back my opinions with my money.

Looking at the three hour chart, there’s a range of .8543 to .8676. Another thing that struck me on the chart was the beautiful symmetry of the moves back in August. From there it moved out of its triangle and is currently in a consolidation range. It’s showing some symmetry here as well.

Notice that it’s well above the .618 retracement of the July to October ’08 move down. And, as I wrote last week, this .8500 area is significant historically, all the way back to the 1980s. My Gann calculations on different highs and lows also show the significance of this area. It has also cleared the .8524 high from back in September ‘08. Why do I consider that high significant? Because it was the last high before the egregious move down. So if it can get above its current range high of 8676 it might have some significant moves ahead. If it breaks below, it will also be significant.

With a trading range such as this, also known as a rectangle, box, or horizontal channel, the price must touch the support and resistance lines at least twice. Edwards and Magee, in their classic work Technical Analysis of Stock Trends, believed ranges were most often continuation patterns. It’s also worth noting that there are many false and premature breakouts (Encyclopedia of Chart Patterns, Bulkowski, 2000). Regardless, the pair will exit this range eventually. Even if you just trade support and resistance though, it’s a wide enough rectangle that you could pick up 70 to 100 pips with tight stops. However I’m hoping to not have that kind of trade because both the upside and downside on a breakout offers much more potential profit.

Another thing I like about the pair on this chart is that RSI isn’t falling too far on the reactions. That’s a bullish sign. I use RSI primarily for divergences and for such things as this and not usually for buy or sell signals depending on overbought or oversold levels. There is one concern here, though, in that the RSI is showing momentum is falling off so there is some divergence.

As usual, I’ll just have to continue to study price action. And of course I have a tight stop since I entered near the bottom of the range.

None of the above is a trade recommendation of course. Remember that trading involves substantial 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.

Triple Witching Week

This week is triple witching week which happens once a quarter on the third Friday of March, June, September, and December. For the last five years, pairs such as the Euro, GBP, and AUD have usually ended such weeks up although five years does not a statistical study make. All the expiration activity doesn't seem to predict future prices but of course your limit and stop orders can sometimes be triggered. Just one more variable that can interfere with technical analysis.

EUR/USD

The EUR/USD had a nice run up earlier this week but it's not moving worth a sou right now. Where's the action? But this is what trading is all about--waiting for another move that will be definitive. Trading is nothing if not about patience and yet patience is the one trait many traders seem to lack. Actually, patience isn't the bon mot. It's too bland. Forebearance would be better--a determined struggle to not give in to negative feelings. How many times has someone bailed out of a trade after the pair waffled back and forth and then watched as it took off in whatever direction one was originally in? Or, getting into a trade, one starts to second guess oneself?

There are various ways to cope with this and I'll be getting into some of them over the weekend. For now, I thought I'd amuse myself by building a word cloud of some of the recent news about the Euro. Isn't that cute?

The first chart is my 3 hour/3 box P&F chart, based on close. It shows the uptrend, an engaging consolidation period, and the pair is now at a key resistance level. If it can break through....but I'm getting ahead of myself. Note the symmetry in time of the last moves up. It evokes the three-drive pattern from which one could expect a break down.

The last chart is the hourly updated from yesterday. One could still make the case for the broadening pattern but there is also the appearance of an upward wedge with its two upsloping lines and multiple touches. However, one could also argue for a pennant.

More important to me is that there has been selling that has come in several times when the pair has achieved this level (take a look at the 15-minute chart). So even in the face of the strong uptrend, I feel OK with my short with its teensy-weensy, yellow polka dotted stop. Remember, I will reverse myself if and when taken out, depending on what the market shows me.

Now I have to remind anyone reading this that these aren't trade recommendations. They're just my musings. All trading carries significant risks the lawyers tell us to say. And you know something? They're right. That's why I keep my stops small.

Long entry into AUD/USD

As soon as I woke up this morning I entered the AUD/USD long based on the analysis in my prior post from the weekend. That's the picture on the right (I'm having a little trouble posting pictures but I'll figure it out). I wish I'd woken up a bit earlier but there you go. In any case, even though it was up only 30 pips at this point I decided to move my stop to breakeven (the red line) because I'm thinking I can get a better entry on a pullback. I'm a technical trader so I don't pay a lot of attention to news. But I'm wondering if the good news from Australia (businesss conditions up and more important, business confidence up) isn't behind this quick spike.

I also went long GBP/USD this morning (the chart on the left above) but only after getting stopped out from a short. I honestly think this pair is weaker than it's acting but price behavior trumps my opinion at the moment. After some nice long candles, though, there's a little uncertainty being indicated by the market. Its stop is also moved up to breakeven plus 10. Here's that entry on the hourly chart.

Hedging

Sometimes traders, usually inexperienced or going through a period where fear is the prevailing emotion, decide to “hedge.” Using the case of the AUD/USD in my previous posting they might decide to take two trades—one long and one short in the same pair.

Is this a good idea? After all, if you have tight stops and it starts to run in one direction…

The answer is no.

First, this isn’t really hedging which has to do with exploiting inefficiencies across different markets. The kind of trader that would “hedge” this situation usually is one who has a few other walls to climb, e.g. they close out trades too quickly and don’t adhere to tight stops. You can’t make money this way. In fact, you can lose money.

Technical trading requires hard work; technical trading requires making an informed decision.

Gann wrote in How to Make Profits in Commodities, “Many traders have the idea…they can hedge and protect themselves. There is no greater mistake than this. It often turns out the trader loses on both trades. If you are in the market WRONG (Gann used the caps) and don’t know what to do, there is but one thing to do. Get out and wait until you know there is a definite trend….[Hedging] does not pay and you must avoid it.”

Gartley wrote, “The first and most important part of this analytical procedure is the accurate determination of existing supply and demand conditions.” (Profits in the Stock Market) This requires study and hard work. He also wrote, “the technical approach also appeals to many persons because the vast majority are inherently lazy….[but] the technical approach…demands constant study and the application of reasonable judgment.”

Back in July there was brouhaha over the new NFA rules regarding hedging. People wrote posts on forums saying they were going to open accounts with brokers outside the USA because they could no longer hedge. Many of the brokers played into this misunderstanding of the ruling.

FXCM, in its communication to its users on this rule, wrote, “forex traders will no longer have the ability to selectively place stop-loss or limit orders on individual trades, nor will traders be able to modify or close trades from the “Open Positions” window.”

This is not what the rule said. The rule said FIFO—first in; first out.. The first trade you open must be the trade you close first. If you go long and then try to “hedge” by opening a short position, you must close the first long position out before you can open the short position. It has nothing to do with not being able to place stops on any given trade. It has nothing to do with not being able to set profit targets on a given trade. It also doesn’t say you can’t have two trades in the same direction. (Scaling in? Let’s talk about that some other time). Of course you can also have two accounts where you have a long in one and a short in the other in the same pair.

NFA defines hedging as “where customers take long and short positions in the same currency pair in the same account.” The people at NFA think you don’t “understand either the lack of economic benefit or the financial costs involved.” They think you won’t be able to be profitable with this kind of approach. They also think it, “increases the customer’s financial costs in several ways.”

They have a point. When you buy long and sell short on the same pair you pay the spread twice. In addition, while one would think that the interest paid or received on the two opposite positions would offset, this doesn’t seem to be reality in many cases. In part this is because of the squirrely ways some brokers deal with interest.

It’s not my argument that government should be regulating traders to death. Hey, maybe if people want to throw their money away they should be allowed to do so. Regardless of how you feel about that, this rule actually addresses something that gives people the allusion they’re in control. God knows, many of us felt out of control when we first started trading. Some continue to feel that way—buffeted by an irrational market; stops being gunned by the big players; that some system or guru somewhere has the knowledge so desperately needed.

But I digress. The idea of hedging the same pair isn’t for the trader who wants to learn to be successful. To this kind of hedging I paraphrase George Carlin: “It’s BS folks and it’s bad for you.”