(Click here for chart)

What do we see?

Well after the Yen strengthened against the USD at the beginning of this month we saw it retrace back to its 50% Fibonacci retracement level, which it failed to break. Another interesting Fibonacci development is that we can currently see over the last couple of weeks the USDJPY’s failure in staying above its 38.2% retracement level (you can see plenty of daily wicks passing through this zone but not too many closes above it).

Add to that the fact that during this congestion period there’s a nice bearish pennant forming.

So what does it all mean? How would I trade this?

Well, for me personally, I’d be looking at opening SHORT positions around the 38.2% retracement mark (around 117.60-5) with stops outside the downward sloping pennant line (plus some breathing space) at 118.15 (giving us an initial ~50 pip stop loss). Otherwise, if the SHORT limit entry is missed I’d be looking to enter SHORT on stops at 116.85 (a break below the upward sloping pennant trend line) my initial stop loss would probably be around 40-50 pips away from entry, but upon it’s breakout I’d quickly move the stop down to the high (+10-15 pips) of the breakout bar.

My target for both entries would be the pole length, being the difference between the 100% Fibonacci retracement point (~121.60) and 0% Fibonacci retracement point (~115.20) on the chart, which gives me a target of 640 pips!

What if I were to get stopped out on the 117.60-5 at 118.15?

If I were to get stopped out I’d stop and reverse my position going LONG with stops back at 117.65 (50 pips). I’d need to be careful here as a pennant formation could very easily turn into a flag and I’d be watching the 50% retracement zone very carefully (~118.50). If we get a successful close above the 50% zone I’d be looking for the USDJPY to hit the 100% Fibonacci retracement on the chart as target – being 121.60.

If the market were to hit my stop loss on my entry stop position I would close all positions and would NOT reverse my position – I’d take the loss on the chin and move on to the next trade.

Please be aware that medium and long-term outlooks may look as though they are going to work in the short-term, however, with the nature of things in this world one event can quite easily unsettle these views/chart formations and throw everything out of whack quickly. Just because I have a long-term view doesn’t mean I keep it for months and months regardless of what is happening. As traders we need to be on our toes. I know my view(s) can easily change in a week or two depending upon price action… but I always hope that it remains for months and months, because then I’d know I’m making money!

Anyway, we’ll see how it goes.

Tags: Currency Analysis, USDJPY

There are several interesting patterns on the AUDUSD that I’d like to share.

Here’s a weekly chart of the AUDUSD.

Notice how we have an extremely large (and albeit ugly) head and shoulders pattern. Add to the fact that the right shoulder didn’t dip as far south as the left shoulder and we have a currency ready to move.

Not only that but we also have an ascending triangle that has formed over the last 3 years.

So what does all this mean? Well I for one am quite bullish the AUD/USD – as this is a weekly chart I’ll be keeping an eye on how the AUDUSD closes at the end of this week, and then how it reacts to any successful close beyond 0.8000 the week after. As an example, if we have a successful break this Friday, yet by the following Friday we see the AUDUSD back below 0.8000 then resistance is still strong and we may get further downside before it attacks it again – provided the AUD/USD doesn’t retrace too far.

Potential targets for this move would be the ascending triangle’s side of about 1200-1300 pips (0.8000 – 0.6800), therefore being, around 0.9200-0.9300. The head and shoulders target is phenomenally higher again giving a target some 3200-3300 pips above 0.8000 (0.8000 – 0.4700) – if this gets reached then we’d see the ol’ 1980 glory days of the AUD!

But is this a strategy that anybody could use? It definitely isn’t one for us small retail traders – our stops would need to be very large making the position size so small we wouldn’t even be able to enter in.

However, by providing a long-term view of where we perceive a currency may go in the future it can help our trading by only short-term taking trades in the long-term direction.

Tags: AUD USD, Currency Analysis

However, just as each flag formation has a break point where we know it is likely to continue in the direction of the flag pole it EQUALLY has an opposing break point where when its opposing break point is broken we will see the market retrace back to the start of the pole.

But trading the inverse break does take some knack.

First, we need to know where this break point exists. As a general rule most flag break points occur around the 50% mark of the flag pole, however, experienced traders can sometimes pinpoint earlier entry points and one of these earlier entry points is where the second peak/trough occurs during the consolidation/flag period.

In the case of the GBPJPY and CHFJPY formations yesterday I identified the second peak in both charts. I knew that if these prices were broken it would end the flag formation for how it should normally be traded (being in the direction of the pole).

But what would’ve happened if we’d traded the inverse break?

Entry for the inverse break would’ve been at a move above the 218.31 (+ spread) point, with stops being difficult to place but are generally placed at the low of the flag pole (now can you see why it’s important to have the flag stay within the pole’s range, if we have wicks passing through the extreme it’s hard to not only find entry, but also where to place stops on the inverse). Our target would’ve been the other extreme of the pole being 220.34 which hasn’t been reached on the GBPJPY yet.

GBPJPY chart

On the other chart – the CHFJPY – we would have had entry at the break point of 93.75 (+ spread), with stops either at the low of the flag pole or at the low of the wick that pierced the flag pole’s low. Interestingly the CHFJPY hit its target, being the high of the flag pole at 94.68 (just under 90 pips made).

CHFJPY chart

What tell tale signs were there that the CHFJPY was MORE probable to achieve its target than the GBPJPY?

Tags: CHFJPY, Currency Analysis, GBPJPY

(The EURJPY is forming a bearish flag too but it isn’t as nice – it has already had closing hourly bars beyond the low of the flag pole at 147.83 making entry a little difficult, although having said that this would imply the EUR is weaker against the JPY than the GBP and the CHF.)

So I’ll be a spectator on this one, and will watch to see if the flag formation unfolds.

Several things I like about the CHFJPY in comparison to the GBPJPY discussed previously is that the CHFJPY has only had one snap at the low 93.29.

Okay, what’s the first thing I check after seeing a potential flag? Announcements. And there’s nothing on the announcement front for the CHF or the JPY so if there were to be a break this may take a little longer but also may be more directional (no whipsaws from volatile announcements).

Alright, what’s our risk:reward?

The flag pole distance is… 94.68 – 93.29 = 139 pips

If we place our sell entry stop at the low of the bar that saw it move below 93.29 (being 93.22) where would I place my stops?

Just as with the GBPJPY analysis I’d be inclined to place it above the high (+ spread) of the second peak formation in the flag consolidation period, being 93.75 (+ spread). My risk for this trade would then be…

93.75 – 93.29 = 53 pips

Our risk ratio is 53:139 equating to 1:2.6, and again to improve this ratio I’d probably look to sell a small amount of lots NOW with stops above 93.75 (+ spread) knowing that if the CHFJPY were to get to this level the entire bearish flag formation would be nullified.

But again, I’m not likely to trade this currency pair as I’ve never traded flag formations on it before.

(Interestingly though the high on 31 August @ 95.65 and the low of 5 September @ 93.65 gave us a 50% zone @ 94.65 – the highest the currency got on 7th September last week was 94.68 before it eventually fell its 139 pips forming this week’s flag pole.)

Tags: CHFJPY, Currency Analysis

There are several things about this flag formation that I’d like to briefly discuss (a screen capture shot of what I’m currently looking at can be seen here).

As with all flag formations we need to check for any announcements that could cause problems. We’ve already had some semi-important JPY announcements, but they haven’t seem to have done much. We do though have some important GBP announcements being released today, namely, PPI and Trade Balance, and both appear to be somewhat mixed – the PPI seems to indicate that the GBP will weaken, whereas the Trade Balance is slightly positive for the GBP.

Hmm… tough call.

But we’ll move on to our analysis of the GBPJPY flag formation.

As with all flag formations it’s important to gauge what is happening with the market’s activity in the consolidation period after the pole. Notice during the GBPJPY’s consolidation period we have lower lows and lower highs – in fact we have the currency falling beneath the low of the flag pole! This shows me that there is inherent weakness of the GBP against the JPY.

But it causes us problems when trading this formation.

Why?

Well, one way to trade a flag is to place a stop order at the low of the flag pole and wait for the currency to break in the direction of the pole. In the case of the GBPJPY we would place a sell stop order at 217.58 (the low of the flag pole). However, the currency has already bobbed through this area several times and failed to continue the break – indicating strength at this support zone.

So what do we do?

There are two things that I do in these cases:
1. I place a sell stop entry order at 5-10 pips below the low of the failed breaks. The lowest low during the failed breaks was 217.36, therefore, I’d be likely to place an order at 217.29, otherwise…
2. I go at market with my sell entry order if the GBPJPY has an hourly close beneath the 217.58 price. As the GBPJPY has failed several times to close beyond this price this would indicate weakness. However, the bar that forms this close beyond the 217.58 low needs to be a breakout type bar – i.e. it needs to close near the low, and have it’s open near the high (it needs to show that she’s ready to go).

I’m more inclined to do the first strategy as the close beyond the low may see my entry waaay below the low, however, I’m concerned about my risk:reward ratio with the sell stop entry order at 217.29.

Let’s calculate the reward for this trade.

The distance of the flag pole is… 220.34 – 217.58 = 276 pips (50% of this would be 138 pips)

So the reward for this trade would be 276 pips.

What would be my risk?

If my entry was at 217.29 where would I place my stop? Some may be inclined to place their stop at the 50% mark of the flag pole – being 218.96 (+ spread), however, I think this is unneccesary for the way this flag has formed. And my reasoning has to do with the way the flag has formed. I think a better risk stop would be the second high formed during the flag consolidation at 218.31 (+ spread). Picturing this in my mind I know if the market falls to 217.29 and then rallies back above 218.31 the flag would CLEARLY have failed.

Our risk:reward ratio would therefore be 102:276 which isn’t bad (anything above 1:2.5 I trade, with 1:3 being the best).

To improve my risk:reward ratio I’ll likely place a trade now to sell a small amount of lots while the currency is consolidating and place stops for this order around the 218.31 (+ spread) area.

This would mean any movement above 218.31 would indicate a failure for this flag formation and all open sell entry orders that haven’t been hit would be cancelled.

Getting back to the announcement conundrum – I’d probably still trade this formation if everything holds, however, I’ll be keeping a close eye when the GBP announcements are released – I’m hoping there will be no whipsawing action.

Tags: Currency Analysis, GBPJPY

For those unfamiliar with bearish flags these are formations whereby the currency has had a decisive directional move followed by a nice tight consolidation period after. As a general rule whatever direction was made PRIOR to the consolidation, is what will occur after the consolidation. So in the case of the GBPUSD the direction prior to the consolidation was DOWN, therefore, it would be highly probable that the break out of this consolidation will be the downside.

A current chart of this phenomenon can be seen here.

But identifying such a pattern means nothing unless a strategy can be created involving it.

Before I begin formulating such a strategy I like to quickly take a peek at Forex Factory’s Economic Calendar to see if anything is likely to help or hinder this directional trade by way of economic announcements… and one such announcement being made today is Industrial Production, which, according to the forecast is likely to be positive for the GBPUSD and should see it move north.

Okay, with that in mind what should one do?

Well, as the economic announcement isn’t anything major I’d still like to trade this currency in the direction of the formation. Therefore, I will place a sell stop entry order at 8930, with a further sell stop entry order at 8910 with stops for these at the 50% retracement zone of 8992 (+ spread).

However, as the economic announcement is slightly bullish in flavour I will place a buy entry stop at 8973 with stops at 8910 (I would then watch 9010 as a target, and if all goes well through this level 9070 as the ultimate target).

These orders will go on at 0400 NY EST if none of the entry prices have been broken since then.

This is just me thinking out loud… and not to be construed as trading advice.

But what about the EURUSD or the USDCHF? Don’t they have similar directional movements on their hourly charts?

They do, but if you look at their flag poles you’ll see that the poles (the directional part of their move) was interrupted – i.e. it wasn’t as sharp as the GBPUSD. And while I do prefer uninterrupted flag poles (where with each candle we see lower highs – for BEARISH flags – and higher lows – for BULLISH flags) the interruptions during the GBPUSD’s flag pole formation aren’t as lengthy in time and in price than the EURUSD and USDCHF.

Tags: Currency Analysis, GBP USD

What I will now try find is a good entry point that will complement this favorable announcement for the NZD.

At present the NZDUSD has been inside a 3.5 month downward trending channel… as defined by our daily chart.

HOWEVER, one bullish feature that I have noticed has been an INVERSE HEAD & SHOULDERS!

A what????

An inverse head & shoulders pattern is where the market forms a trough, labelled the “left shoulder” (LS in the chart), then forms a LOWER trough, labelled the “Head” (H in the chart), then a HIGHER trough, labelled the “right shoulder” (RS in the chart). The peaks that formed between the LS-H troughs and the H-RS troughs should be roughly the same price. The line that joins the two peaks together is known as the neckline (labelled as N in the chart).

So how do you effectively trade an inverse head & shoulders pattern?

Well… being a Currency Secrets reader, and therefore not a normal person, you should be able to tell me?

Obviously our answer would be to place a buy entry stop above the neckline with an attaching stop loss at the RS low (being at 0.7035). If we get a good breakout candle then we could possibly move our stop to the low of the candle responsible for the breakout.

We could also just WAIT for a breakout first before entering so that our initial stop loss is reduced from its 140-150 pips to something that might end up being only 40-50 pips.

Of course, for those who have accessed the locked pages, you may have some idea of I’m likely to do today!!

One last thing that you need to know about the inverse head and shoulders pattern is that the distance of the move (once the instrument has successfully broken the neckline) can be measured by calculating the distance from the head to the neckline and adding this distance from the neckline.

In the case of the NZDUSD the neckline is around 0.7180, the head’s lowest close is 0.6977, therefore the distance is about 200 pips placing the target of a successful breakout at around 0.7380… this will see it outside the medium-term down trend that it has been in over the last 3.5 months. I’d watch 0.7300 just in case this downward trend has any impact on this move eventuating (as this is where the trend line seems to lay).

Anyway, I’m bullish the NZDUSD and with the announcement that is being released this Wednesday I am preparing my bullishness by getting in before everyone else.

Tags: Currency Analysis, Forex Trading, NZD USD