What’s up crew? Another week has passed and we had some big movers! I’ve been a bit quieter this week since I’m working on refining one of the strategies I trade. This means a lot of programming, a lot of Excel and just general data crunching and testing. It’s relatively boring work and takes a long time, but it’s exactly this kind of work that pays off in the end.
For reversal trading, we had a couple of beautiful trading opportunities. A couple of nice examples are a CHFJPY 4H short after a break of the trendline and a short reversal on USDJPY 4H (see the chart shot below). At the same time, a lot of setups seemed to be at the edge of reversing but then continued. Many market moves were driven by a couple of bigger news events. We’ll go over a few of the big themes that drove the markets in a moment.
Current market behaviour
This week, we had US Fed’s Yellen testify against the Senate. This event, spread out over two days, had the market on edge. While no groundbreaking changes were expected, it’s always interesting to look for cues that something is shifting, perhaps some wording that is chosen differently. In all, Yellen’s message was largely unchanged but did contain a slightly dovish undertone. This dovish view was confirmed by the disappointing CPI and retail sales data on Friday, which made the dollar tank.
This wasn’t the only data point, though, as lower impact US data releases were also disappointing. All of this is reflected in the course of the dollar this week: a one-way ticket down. The market ended much lower in a week that was pretty much a continued sell-off for the US currency. Gold stayed true to its nature and in the absence of any groundbreaking geopolitical events and rallied in what could be the start of a new uptrend.
Oil, stimulated by better than expected inventory numbers, was largely up for the week. It printed an inverse head and shoulders pattern (see the left part of the oil panel) right at a previous demand area, so this move was actually a very nice technical reversal setup as well.
On Wednesday, the Bank of Canada raised the interest rates for the first time in 7 years. This hike was largely priced in but it was the accompanying report, citing bolstered confidence in the Canadian economy, which sent the Canadian dollar soaring. It was hardly surprising as we have seen a continued stream of positive data points from Canada, but the past week has shown that the Bank of Canada and its governor Poloz have a similar view. The reaction didn’t stay out:
And finally, the UK economy released better than expected jobs and unemployment numbers on Wednesday. The fact that the UK unemployment rate fell to a new 42-year low, sent GBPUSD upwards and also allowed it to break out of a bearish channel it was in. It kept on rallying for the remainder of the week and went to highs not seen since September last year:
This week, I’m going to have a look at a trade I’m still in! I’ve taken a short EURAUD on the daily chart. It’s a longer-term reversal that has multiple things going for it. I’ve allowed it to play out over the weekend, but that’s not really an issue since this is a daily setup. Let’s first have a look at the charts:
This setup is a little bit more complex than our usual reversal setup, but there are many reasons why I think this could work out. I’ll go over the factors one by one:
This is a trend that has been going for a while but has been losing steam recently. We could see a breakdown in June already, but that sell-off found a bit of support and moved back up. However, the price could never make a higher high anymore, which gives us valuable information. Afterwards, the sell-off continued.
Break of horizontal support
I identified a horizontal support area (in blue) where the price has bounced from multiple times before. On Thursday, the price broke through this area after it previous acted as support. To me, this was a signal that a short bias might be justified.
Break of two trend lines
First, we have the obvious longer-term trend line of the major uptrend. Then, there is also a local trend line (or inner trend line, whatever you want to call it). Both were broken convincingly on Thursday as well. This is a major factor, as this indicates that the trend as it currently exists might finally turn.
Strong bearish momentum
Look at the candles of the last 3 days. All of them are very strong and bearish, which signifies momentum to the downside. Simple as that.
There is a gap
On the left of the chart, there is a price gap. As gaps often want to be filled, I’ve marked this as an additional area of interest and an area where I would take profit.
The place where the price currently is could act as support as well, so I’ll be monitoring the trade as we open on Monday to see if I can find any clues if the momentum is still there or not. But so far, the pieces of the puzzle are falling together quite nicely.
The way I just broke down my reasons for taking a trade is how I often build a story around my charts. The multiple confluence factors give me a market bias but also allow me to read the market in a way that is more profound than just spotting a single reversal pattern. Let’s see how this trade turns out!
The upcoming week
For next week, we have a few interesting events, such as the Aussie RBA and employment data, interest rate decisions from the BoJ and ECB and Canadian news on Friday. The US will be looking at housing data on Tuesday and the Philly Fed manufacturing data on Thursday in order to get a signal that the economy might be picking up. The week starts off slow but then accelerates with Thursday being the busiest day of the week. Here is the overview of next week:
- Monday: JPY Holiday (Ocean Day), EUR CPI
- Tuesday: NZD CPI, AUD RBA Meeting Minutes, GBP CPI, EUR German ZEW Economic Sentiment
- Wednesday: USD Building Permits, USD Housing Starts, USD Crude Oil Inventories
- Thursday: AUD Employment Change and Unemployment Rate, JPY Interest Rate Decision, Monetary Policy Statement and press conference, GBP Retail Sales, EUR ECB Interest Rate Decision and Deposit Facility Rate, USD Philadelphia Fed Manufacturing Index, ECB Press Conference
- Friday: CAD Core CPI, CAD Core Retail Sales
For this weekly forex outlook, I’m keeping an eye on the following pairs:
Follow my published ideas on TradingView.
Oh man, I’ve been waiting for this setup to materialise since… ever! On continued euro bullishness, the price kept on going up! Last week, however, we saw the beginning of a sell-off, fuelled by the good UK unemployment numbers. The price is currently at a critical support zone and I’m obviously interested in shorting it, once it breaks.
There’s not that much to say that hasn’t already been said in a previous weekly outlook, but to recap: long uptrend that transitioned in a flatter price structure. While we can still see higher highs, we have put in a lower low. Together with the strong bearish behaviour of the past 3 days, this gets me interested. However!
I prefer if the price would make a bounce from the current support zone and make a run up again, but at the same time making a lower high. I feel that if this would happen, the bulls would be properly exhausted and the bears could then find some ammo to short this pair again. As we can never know what happens, I have just put a price alert around the 0.87400 level and will keep an eye on what happens on the Monday open.
For the next setup, we keep with the euro weakness theme, this time combined with JPY strength. After a strong and long uptrend, this pair is now struggling at a resistance zone and has put in a sloped head and shoulders pattern. It broke the neckline, but that alone wasn’t enough for me to get in.
Price bounced off an intermediate support level that initially acted as resistance. It only seems logical that the price first can break and close below this level, before getting in. What we currently see is a break of the H&S neckline and a retest of that same neckline. So if the price manages to close below the previous local low (around the 128.600 level), I’d say that the retest is valid and price will attempt to make a move lower.
This one should be fairly familiar to you! GBPNZD on the daily is a setup I’ve talked about before. As you know with daily setups, these might take a bit longer to develop so they are sometimes carried over into the next week even though the setup is still valid. Even more so this time, I think this one might be ready to pop.
So after a long downtrend, we can see a move up, followed by a range consolidation. What often happens in the markets is a pattern called drive – consolidation – drive, in which after a strong move up (or down), we see a consolidation of buyers and sellers. After this has happened for some time, it’s very common to see another drive in the same direction of the original one.
This is the case here, and the price action on Thursday and Friday only adds to this picture. On Thursday, the price tried to make a run for the lows but failed, printing a bullish pin bar. Friday added to this story with a strong bullish candle that closed near the highs of the range. Readers of this site might recognise this as a pin and drive entry trigger. It would’ve been even better if Friday had closed above the range, but it’s still a nice setup. Depending on the price action on Monday, I might take a position in this one relatively quickly but as always, patience is required.
Finally, we have a setup for NZDCHF on the hourly charts. After a strong move up, we could see a very nice spike up. This was followed by ranging price action with some attempts to break the lower bounds, none of them successful so far. While I’m not sure that the price will break to the downside, this setup is as easy as they come.
Wait for a break and close with momentum, below 0.70600. There’s very little structure in the way that might keep a price from bouncing up again, so we could potentially see a nice move down.
Good luck trading!
What setups are you looking at? Share your thoughts in the comments!
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