Currency Secrets

If there’s one thing that most of you should probably know by now and that is that I just love congestions.

Why?

Simply because you can easily define support and resistance points.

We have popular patterns such as:

• pennants
• flags
• triangles
• ranges

And all these other fancy names that revolve around the market doing something but going nowhere.

It also makes my job at making money all the more easier too.

So what has me so excited about the USDCHF & AUDUSD charts?

On the USDCHF chart we have a pennant forming on its hourly chart (click the image to enlarge):

On the AUDUSD chart we have sideways congestion, with anticipation of a breakout to the downside (click the image to enlarge):

Oop… USDCHF breaking out.

Outta here.

Once every two-three months I like to gauge which currency is the strongest and weakest out of the top currency crosses (AUD, CAD, EUR, GBP, JPY, CHF) against the USD.

The reason I do this is that it helps to know which currency to open a position in if a negative or positive economic report is released by the USD, and to open a position that would best take advantage of the strong/weak USD economic report.

As an example, if the AUD has decreased 10% against the USD over the last 3 months, and the EUR has decreased 15% against the USD then if the USD were to release a negative report it could safely be assumed that the AUD will likely rally further than the USD as it hasn’t depreciated as much as the EUR.

Of course this is not always the case and here are some things to be mindful of:

• Does the economic report influence JUST the USD or are there other repercussions against the currency you are considering to trade?
• Does the currency you are considering to trade have any economic releases soon?
• What does the chart say?

There are many ways to gauge which currencies are the strongest/weakest against the USD. Here are some methods that I’ve used:

• Rate of change of the CLOSE over the last 20 trading days (or 60 trading days)
• Rate of change of a MOVING AVERAGE of the CLOSES over the last 20 trading days (or 60 trading days)
• Using channel lines

The method that I prefer is the rate of change of the moving averages coupled with the channel lines. I plot a 20-day moving average and then obtain the rate of change of this moving average over the last 20 days and 60 days. I then just compare the raw figures of these stats to see which currency has the highest number and which currency has the lowest number.

Once I have the two currencies that are the strongest and the weakest against the USD I then plot their charts to determine where resistance and support lay, as these technical zones override any arbitrary rate of change figure.

Here is a table showing these stats (note that the USD is the BASE currency for each currency cross – makes it easier to identify):

CURRENCY >> ROC(SMA(20),20) % >> ROC(SMA(60), 60) %
AUDUSD (2.07) (0.67)
CADUSD (0.99) (0.84)
CHFUSD (3.19) (2.54)
EURUSD (3.36) (2.65)
GBPUSD (3.64) (1.13)
JPYUSD (1.35) (2.53)

As you can see from the above table ALL currencies have weakened against the USD over the last 20 and 60 days (according to their moving averages). The strongest currency over the last 20 days against the USD has been the CAD, over the last 60 days it has been the AUD. The weakest currency over the last 20 days against the USD has been the GBP, whereas over the last 60 days it has been the EUR.

I’m still bullish the USD with the major currencies – especially against the GBP, EUR & CHF crosses.

Why?

At present we have a bearish candlestick pattern that is known as the Falling Three (or the Rising Three if you are looking at the USDCHF) on these currencies DAILY charts.

To see what a falling three pattern looks like go here – and then see if you can identify it on the GBPUSD & EURUSD charts. Similarly, to see what a rising three pattern looks like go here – and see if you can identify it on the USDCHF.

In essence this type of candlestick pattern confirms that the underlying trend is set to continue.

In a way I guess the falling and rising three patterns are similar to a flag formation:

• initially there is a breakout (the large down candle on the EURUSD & GBPUSD)…
• followed by congestion that is weak and goes sideways over the next three days (notice that over the last three days there was no move back to the START of the breakout – this implies that the bears are still in control… just in hibernation!)…
• and then there’s the continuation breakout!

Just like a flag, except with this pattern we have an exact quantity of days that needs to be met for the congestion period – and no real limit to how far the currency INSIDE the congestion can rise to (although I generally don’t like the falling/rising three pattern to exceed the open of the initial breakout candle).

Therefore, I’d be looking for further weakness in these three currencies today and tomorrow with today seeing EURUSD hit 1.2500, the GBPUSD hit 1.8200, and the USDCHF 1.2400 – I just used the initial breakout candle as a guide on how far today’s breakout is likely to go (I assumed the breakouts would be the same in distance – just like the flag breakouts).