GBPUSD—support and resistance

Last Thursday I wrote that I shorted GBPUSD at 1.6246. The overall move looked corrective to me in the context of the large, sideways pattern. I added to that position at 1.6132, after the pair managed to close below the daily 200 SMA on the shorter-term charts. Obviously, while I don’t believe one should give into the house money effect, I was in profit on the first trade. I also placed a very tight stop on the second trade. Both are in profit as of now (10:32 AM EST), one at 336 pips profit and one at 222 pips profit. I took partial profits from the first trade, once at 1.6134 for +112 pips and once at 1.6014 for +232 pips profit.

What next? Obviously, I’m not going to bail out of short positions that could continue to run but there could be a bounce so I’m keeping my stop relatively far away. On the three-hour chart, the last candle had a longish, lower shadow and the current candle could close above it, hinting that the pair is rejecting lower prices for now. A close below that prior shadow would be bearish. On the one-hour chart, there have been three bullish candles for a short rise. The 4th candle that just completed has a small body. If the current candle closes deep into the third bullish candle, this would be an evening star. This all bears (unfortunate choice of word in this situation, I know) watching. Most likely resistance is:

1.5979 (today’s high)
1.6000/13 (round number and .382 fib retracement from 1/28 high)
1.6058/64/71/85/90 (polarity, various fib retracements, and uptrend line from March low)
1.6135 (speed line)
1.6220 (200 SMA on daily chart)
1.6314 (downtrend from November high)

Support levels are:

1.5851 (January low)
1.5833 (December low)
1.5731 (polarity)
1.5708 (October low)

Here’s the one-hour chart:



© Dianne Fecteau, 2010. 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.

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.

GBPUSD Entry

I wrote earlier this morning that I wanted to short the pound “hopefully around 1.6150.” I ended up entering at 1.6106 after seeing it briefly touch, then back away from, 1.6126. That was my clue that it might not reach 1.6150. Why that price? Based on some calculations using Fib ratios, I believed that was a vulnerable area. But the pair started stumbling on lower time frame charts—15- and 5-minute—and a doji formed on the hourly chart. So I held my nose and jumped in. Remember, I was struggling with the drop in the USD/CHF earlier as well and that pair tends to drop when GBP/USD goes up (not always but often). Also equity futures were bidding up earlier this morning so I thought perhaps the USD was going to take a beating today. These are the kinds of things that make it psychologically difficult to trade. Price on the pound chart was clearly speaking to me and yet my “beliefs” formed from other data were kicking in, making it difficult to take the trade. Regardless, I plunged in. My stop is now a profit stop and the pair is currently down 148 pips.

Let’s take a closer look at the doji on the hour chart below. It’s a honey. Not only does it form after an uptrend (as it must), but there aren’t a lot of them on the chart. The market is overbought so why is there such hesitation which is what the doji represents? It’s at an area I’ve identified as resistance. It’s also at 50% retracement. Finally, one could make an argument that it goes on to become part of a larger candlestick pattern, the evening star. Steve Nison in his book, Japanese Candlestick Charting Techniques (2001), wrote that the evening star consists of three candles. First, there’s a long white candle; then there’s a star (or doji); finally there’s a black real body that cuts deeply into the first white candle’s body. The third candle here doesn’t just cut deeply. It overwhelms the first candle so I’m not sure Nison would endorse this interpretation. Regardless, it was the right entry point. Here’s the hourly 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.

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.

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.

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.

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.