Currency Secrets

It seems that after yesterday’s price action the EUR is far weaker than the GBP against the USD.

The EURUSD finished at 1.2303 nearly 150 below the channel whereas the GBP bounced back inside the channel!

So what can be expected today?

I would expect further downside for the EURUSD… especially considering that the Dutch are now voting on whether to ratify the EU constitution (the French voted NO). However, as it has been in my experience sometimes we can get some wild volatility in the other direction. So be careful with the EUR today.

With the GBPUSD I would watch the low of yesterday just in case the GBP really is weak and DOES decide to break the lower channel trend line. However, as the bounce of yesterday showed the GBP may indeed bounce even back over the broken UPWARD trending trend line that it broke yesterday (similar to what the EUR done on Friday after last Thursday’s break).

If the GBPUSD rallies back above 1.8200 we would have a confirmed bounce, if we see further downside with the EURUSD I would be expecting 1.2000 very soon (watch the news for the results of the Dutch votes too!).

After Tuesday’s trading the AUDUSD has broken down through its bearish flag formation.

Therefore, we should expect further weakness of the AUDUSD and this will be confirmed once it breaks the low of the flag pole (which was formed 16th May – 0.7538).

Initial stop loss can either be placed at the upper most section of the flag formation (being at about 0.7660) – this is the safest option, or 15-20 pips above the flag zone that was broken (being 0.7580 + 20 pips = 0.7600). I personally prefer the tighter stop.

Anyway, let’s see how the AUDUSD pans out over the next coming weeks.

Well, as cautioned in my previous post when ascending triangle patterns fail you don’t want to stick around to see if it will change it’s mind.

Unfortunately the USDJPY broke the resistance zone as indicated, but failed to complete the remainder of the ascending triangle pattern.

However, I do want you to notice one thing: notice after the initial resistance line break the USDJPY fell and rested upon the upward trending trend line and then bounced. This gives weight on where you can safely place your initial stop loss for the BUY STOP entry order above the resistance line.

I still use a 15-20 pip initial stop loss from the resistance line, especially if the resistance line has had 3 or more touches in the past (which the USDJPY did) – because the break SHOULD be relevant (in fact any trend line that has 3 or more touches is important… with the trend line having the most touches being the more significant when broken).

It doesn’t seem as though the European countries are the only ones weakening against the USD… we have an interesting pattern forming on the USDJPY on an hourly basis.

If you’ve never seen what an ascending triangle looks like or know how to trade one effectively then you’re in for a treat: I’m going to show you.

An ascending triangle is a triangle that has a FLAT trend line with an accompanying upward trending trend line connecting the troughs made from each retracement off of the FLAT trend line. You can easily see this by looking at our chart of the USDJPY.

As a general rule I always prefer ascnending triangles to occur during up rallies. In other words, prior to the start of the ascending triangle formation was the USDJPY trending up – even if only in the short-term (obviously the longer the up move the better the chances of having a successful breakout). If we look at a daily chart we notice that over the last couple of weeks the USDJPY has been upward trending.

Why do you do this?

I think it has just been something that I’ve observed over successful and unsuccessful trades throughout the years. I noticed that with the majority of trades that had ascending triangles forming at the base of moves it wasn’t as successful as the ones that traded in the direction of the trend.

Ok, so how do you effectively trade this?

Well you tell me?

If you have a view that the USDJPY is going to break the FLAT trend line (which is what happens with ascending triangles): what point(s) on the chart are best for BUYING and for placing stop losses?

Think… look at the chart again if need be.

Okay, an obvious point is placing a BUY STOP entry order above the flat trend line… good.

Where would the stop for this position go?

Back below the flat trend line?

Below the upward trending trend line that touches all the troughs?

This is a tough one.

If you want safety you would maximize your stop by placing it below the upward trending trend line, however, being the risky nut that I am I prefer placing it 15-20 pips below the flat trend line – I HATE it when the currency fakes an ascending triangle break and I usually render the pattern useless if it happens to come back inside the triangle after breaking it successfully… but that’s just me.

Where’s another possible entry zone?

What if the USDJPY travelled back down to that upward trending trend line?

It’s touched it about 5 times, surely if it touched it again it would likely bounce??… It’s touched it and bounced 5 times… why not again? Is there a law that says that trend lines can only be touched 5 times. No… of course not.

So why not place a BUY LIMIT order on or 5 pips above this upward trending trend line (you might need to amend it once every hour as the trend line increases in price) and attach a stop loss order below the last trough (or last successful bounce off of that trend line).

Why so far away?

In my experience I’ve found that the market can whip those who are too tight with their stops in trades like these and will frequently move below the upward trending trend line, but then rally back above it so that it FAILS to break the upward trending trend line and thereby keep it (and the overall pattern) intact.

So be careful of whips if you place BUY LIMIT entry orders around this zone.

What target should I aim for?

As with the flag ascending triangles provide an *indication* of where price is *likely* to go.

The general rule for the length of the breakout is measured between the FLAT trend line’s price TO the first trough formed. In the case of USDJPY the FLAT resistance line is at around 108.30 with the first trough formed around 107.25… meaning that the move is likely to be around 100 pips from 108.30… ending at 109.30.

So there you have it: a street smarts way of trading the ascending triangle. We’ll see how it pans out at the end of the day.

If you’ve read our weekend post on the movement conducted by the currencies on Friday you would have been able to ascertain our view on the strengths of the GBP and the EUR in comparison to the USD. By analyzing the power of their retracement back into their downward price break on Thursday you would have known that the the EUR, while weak, was stronger than the GBP – as the EUR retraced further back into Thursday’s break than the GBP.

The GBPUSD failed to rally any higher than 50% of Thursday’s down move so it was to be expected that she would weaken further – with a break below the low of Thursday confirming it.

Yesterday there wasn’t to be much movement expected with both the GBP market and the USD markets shut, and indeed this was the case – the GBPUSD only moved within a range of 50 pips.

But what of today’s early break?

At the moment we have the GBPUSD sitting around 1.8150, slightly below the downward trending channel that is monitoring its current medium-term trend, AND we also have it outside its long-term upward trending channel! This doesn’t bode well for the GBP.

Let’s summarize:

• Breakout from its upward trending channel (will need to be confirmed tomorrow as I prefer two consective closes outside a trend line to confirm a break… NB: this doesn’t mean that I will wait until the second close though before I enter)
• Breakout from its downward trending channel – to the downside!
• Breakout candle forming (opened near its high, travelling at its lows)
• Confirmation of weakness by breaking Thursday’s low

So what’s going to happen to the GBPUSD?

If we see a close beyond 1.8150 today then I would assume that two things are likely: a large move back into the downward trending channel (i.e. a close above 1.8200), or a collapse to 1.7800 possibly 1.7700 within a week!

All of the above factors don’t bode well for the GBP folks and you can no doubt tell that I’m very bearish.

Today and tomorrow will confirm this for me.

What of the EURUSD?

With the EURUSD also confirming signs of weakness we have a similar situation to that of the GBPUSD. A break of the downward trending channel seen at 1.2450 (currently at 1.2392) has clearly indicated that this currency is weakening… especially considering the news made by the French to exit out of the EU!

Watch carefully when the European markets open within the next 5 hours to see how both of these currencies fare.

Looking at the economic announcement front I don’t see too much in the way of releases that can see any of this movement being reversed… maybe Friday with the US NonFarm Payrolls (as these look weaker than expected – for the US economy).

Targets for the GBPUSD this week would be: 1.7800 on the downside, 1.8200 on the upside (I really can’t see it getting up).
EURUSD: 1.2000 on the downside, 1.2600 on the upside (there’s more hope for the EUR getting up than the GBP).

We’ll see how things pan out, again, by tomorrow’s close we should be able to better foresee what is likely to happen.