The purpose of this blog post is to support your learning of the tools and concepts taught at The Duomo Initiative. This post is not intended to substitute your own analysis, to be used as trading advice or to be considered as a signal providing service.
[Published on Sunday 8 May 2016 at 21:00 pm]
Friday’s Non-Farm Payroll (NFP) number missed expectations. However, it doesn’t seem to matter whether it misses or beats the consensus view anymore.
Of course, we do get a reaction in the market to the actual release. But the direction the market moves in doesn’t seem to have a correlation to the actual outcome of the release, as we can see from this article which takes a look at the reaction in the S&P 500.
If you trade using fundamentals, you might be a bit lost with these sorts of outcomes. However, with technical analysis it’s been a different picture altogether.
Take a look at the moves we had in EUR/USD last week, this first image shows a fantastic ABCD 161.8 pattern with a perfect reversal:
And if we look at it on a 1 Hour chart, we can see it coincided with another fantastic setup that we could focus on for more precision.
Notice the triad of price action: volume, momentum and trend – looks like another ‘Empire State’ setup for us. (Note: the Fibonacci lines drawn in the image are the same as the ones above).
Trading based on fundamental analysis can sometimes be frustrating.
You might know for certain that you’re 100% correct in your valuation of the asset, but the reaction in the market won’t always be instantaneous.
This means you can sometimes be forced to wait a while for the market to ‘catch up’ with your thinking and to price the asset correctly.
However, if we stick with technical analysis and only trade the factors we can be certain of, we avoid that frustration. It also means we avoid the opportunity cost of waiting for a trade to unfold.
Looking at the week ahead, we’ll be focusing this week’s analysis on…
For the past few weeks we’ve been focusing solely on EUR/USD, but now I think it’s time to switch focus.
AUD/USD has a strong positive correlation with EUR/USD (0.75 at the moment, in fact) but the positioning of the price makes the technical analysis a little easier to read.
Let’s kick things off with the Daily chart:
This is where the majority of our analysis will be focused. However, as the week goes on, we should be looking at the hourly chart and smaller time frames to make things clearer.
At the moment the smaller time frames are flat-lining after a strong move down – so they are irrelevant until ranges start to form again in the market.
In the chart above we see the following elements:
- The orange trend lines are the strong baseline trend lines. At the moment it’s unclear which one will be respected by the market. We currently have a Type 2 close on the upper baseline (with some minor tolerance for the close of the candle), which could signal some sort of retracement.
- The blue arrow completes the ABCD pattern of a potential Fibonacci setup (weak setup due to there only being a few candles involved). The Fibonacci levels have been mapped out as dotted lines on the chart. We can see that the close wasn’t a perfect Type 2, but due to the size and speed of the move down, we can give some slight tolerance if the setup is confirmed on a lower time frame.
- The blue rectangular area is a reversal zone in the middle of the range. We have just entered that zone now and expect some turbulence for the price. Remember, the top and bottoms of each segment of a reversal zone are the strongest, if there is failure at those levels.
Based on those elements we may be looking at some sort of bullish ‘relief’. Some profit taking after the strong move down, which may lead to a full reversal depending on what action continues from that.
One thing to keep in mind is that the last candle was very long and strong – a sign that the trend may continue. However, there are signs that this candle exhausted itself due to the nicely sized wick on the lower end of the candle – resulting in a potential Type 2 close.
It is safe to assume there will be some form of move upwards.
Focus on the intra-day; if the move happens early in the day, keep an eye on the momentum as typically a ‘relief’ retracement that happens early in the creation of the candle will reverse itself after the initial bounce.
In other words, if the candle starts off being strongly bullish, momentum may run out mid-session and close bearish. Momentum is the key part of the triad of price action to monitor here.
Let’s look at the weekly chart to see what’s happening on the bigger picture:
Here we can see the price closed as a Type 2 on an unconfirmed trend line and we still have some space to go until we hit the confirmed baseline.
The blue horizontal level is the Swing high from the previous peaks in the market. The last candle closed as a Type 1 on that level.
The market overall is clearly in a downtrend and we are just reversing downwards from a Type 3 close on the downwards baseline trend line.
However, we can now see that we’ve got our first ‘higher high’ and a further reversal upwards will give a ‘higher low’ too – potentially leading to a trend change.
The candle for last week was strong in momentum without much of a lower wick, so although we may have some sort of relief retracement, we can expect momentum to continue. The reversal will happen only after all bearish momentum has died out (if the last candle was an exhaustion candle, we will expect this week’s candle to be smaller with a relatively large lower wick).
Based on the bigger picture, I would hesitate to hold onto any long trades (bullish trades) until the weekly picture looks like bearish momentum has died.
Therefore, any long trades from the Daily chart should be intra-day and short-term while we monitor whether the downwards momentum will continue or we will see a higher low.