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Breakouts are popular among traders. However they can be so punishing if you get it wrong. Why? For the fact that buy high to sell higher means that you have bought at the worst price if you are wrong. And because false breaks are really common.

Well AUDUSD is at this point. Break or fade?

AUDUSD bullish breakout or fade-out

For bulls to play the break, look for a bull flag on the 4-hour chart that builds base at the yellow zone. Such a consolidation will allow late bulls to find low risk entry points for going long.

For bears to play the fade, 1. get a reversal candlestick pattern on day chart or 2. wait for reversal chart pattern on lower time-frames.

The potential morning star on the AUDUSD daily chart points to a bear trap. Although the picture is only complete when the candle closes, a strong bullish momentum is already visible on the 4-hour chart. Before big bears look for a short once more, we need to see a higher pullback so that both the bullish momentum and upside risk can diminish.

AUDUSD regret break of February high

Strong bullish momentum has to diminish before bears take risk

In previous postings, we discussed the elements of a good signal. This week we see such a combination unfold before us in the EURYEN. Lets recall.

A good signal has the following:

1. Resistance level provides a ‘hard’ place for price to reverse
2. A chart pattern hints at reversal
3. At the critical point, a candlestick pattern can be seen
4. All of the above come together in a confluence ultimately confirmed with trend line break

Let’s good at the EURYEN chart.

Firstly, the daily chart provides the ‘hard’ place to start looking for a reversal.

Daily resistance hints at reversal

At the 4-hour chart, we can other elements fall in place.

• The violation of the first trend line shows the end of the predominant trend
• A price pullback after the first trend line break hints now a head and shoulder pattern
• A second (shorter) trend line can be drawn to indicate the trend of the pull back
• A big evening doji look-alike bar that violates the second trend line shows the breakdown of the pullback
• Finally the violation of the neckline confirms the head and shoulder formation

Head and shoulder in EURYEN at resistance

Some previous postings

Elements of a trade signal

Reversal signal also shown in Loonie

Based on a Weekly Chart, USDJPY is intact on a downward Channel as shown on the chart below. Even in the last year, the USDJPY has a smaller channel and is still on the downward trend. So, it is safer to trend following USDJPY by shorting it whenever it reaches the top of the channel.

As from the same chart, the probability of bearish reversal candlesticks is high, so we should keep a watch out for evening stars, spinning tops, dojis, bearish engulfing, etc. Just last week ending 8 Jan 2010,  a hanging man variant is formed, so if this downmove is valid, the possible reversal may be at 84.88.

This is based on the assumption that USDJPY will not exceed 95.23 for the coming weeks.

USDJPY Weekly Analysis

With that long term outlook in mind, let’s consider a possible swing movement which could be taking place in the near future.
The 4-hour line chart vividly showed a possible Head and Shoulders pattern which a Right Shoulder is in midst of formation. The validity of this pattern will persist if the tip of Right Shoulder is lower than the Head.

Continuing our discussion of a reversal using EURJPY, here is another illustration where we can see the recurring patterns.

A look at the weekly chart of the Loonie shows that a reversal pattern can be found between October 2008 and March this year.

There recurring patterns we found in the EURJPY can be found here:

1. A resistance provided the ‘hard place’
2. The head and shoulder chart pattern provided  a clue to a reversal at the right shoulder
3. The right shoulder was also an evening star candlestick pattern
4. Lastly the break of the neckline provided the last confirmation we need.

Loonie reversal pattern displayed several clues

A good signal usually combines a number of qualities:

• Price follows the path of least resistance; therefore a roadmap that forms support or resistance is a good reference for a turning point.
• When the price chart prints a chart pattern, the pattern itself provides plenty of clues. Chart patterns usually fall into 3 categories:
  • Continuation
  • Reversal
  • Both of the above
• A candlestick will usually provide a trigger. Some candlesticks are better than others but they are give a hint of market sentiment at the roadmap.
• Lastly a break of a trendline is good confirmation. Note that there is only a fine line between playing ‘breakout’ versus using a trendline as trade confirmation. With the forex market, traders should always be wary of breakout trades because professional will fade the trade.

Let’s look at the EURJPY chart. This is a monthly chart which gives us an excellent illustration of the concepts involved.

Note that the chart has all of the following elements:

1. Roadmap – Channel meets horizontal resistance; level at resistance proves harder to beat
2. A head and shoulder hints at reversal
3. At the critical right shoulder, an evening star can be seen
4. All of the above come together in a confluence ultimately confirmed with trend line break

All elements of a reversal can be found here

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This is another execution by a student. The analysis is flawless but strong market momentum may have stopped this trade out. There was a bearish candlestick pattern in the hourly chart that was apparent in the second attempt on the resistance line. A valid but unfortunate short.

Hi All,

Last night i notice a huge movement in the EUR/USD.

1) initial thoughts at chart “eurusd1 h4″ was to long once the candle close above the “purple channel”

But some teaching by Binni and Tiong Hum came into my mind  “bigger picture”, “false break”, “huge increase is hard to sustain”.

By looking at the bigger picture i manage to draw another channel (in blue) and when i put in the fibo level it is clear to me that shorting this pair is more in line with what i learn.

2) Zoom out to look at the bigger picture draw another 2 channel (blue)

Went in to fine tune at H1 Short after forming of the doji red candle

Regards,
Ivan

EUR meeting resistance

Confluence met

There was apparently a evening star candlestick

The postings here are analyses made for educational purposes. None of the authors, contributors, trainers or management has license to give investment analysis or advice. It is made purely for learning purposes and at no time should be taken as advice to buy or sell. We are not liable to any damange or loss in anyway.

Posting in terraseedsgooglegroups by Swee Beng. In the 15 min and 60 min charts, Swee Beng has pointed out the excellent setups that were available. It is also an excellent illustration of charts in different timeframes yielding different results to their users.

Traders need to bear in mind then to constantly check the higher timeframe and to select the setup that will provide a higher reward-risk outcome.

Finally in the 4-hour chart, we have some zones to wait for.

My descriptions is as follows:

M15 Chart

1) This chart shows a potential short trade because the trendline from the 1234 setup has been broken by the downward momentum movement therefore sellers will be looking for candlestick formation signal to confirm a short entry.

2) The potential exit targets for short-sellers will be fibo-E 138.2 and 161.8.

H1 Chart

1) The fibo-E from the M15 timeframe meets with fibo-R 76.4 of the H1 timeframe. This means that sellers want to get out and buyers want to get in at this optimum level. It’s a marriage made in heaven.

2) This is confirmed by the tail of the candle briefly touches fibo-R 76.4 and immediately rises to break trendline from downtrend. This shows price respect fibo-R 76.4.

H4 Chart

1)  Price break trendline convincingly and this move might be the first indication of reversal.

2)  Price retraced to form a double bottom and a potential equidistant channel is created.

3)  Buyers will be looking for an optimum entry zone somewhere near the lower half of the equidistant channel where there is a horizontal support line and fibo-R level.

4) The potential exit target will be at fibo-E 138.2 which is at the upper half of the equidistant trendline.

Thanks
Swee Beng

15 minute chart

Hourly chart

4 hour chart

The postings here are analyses made for educational purposes. None of the authors, contributors, trainers or management has license to give investment analysis or advice. It is made purely for learning purposes and at no time should be taken as advice to buy or sell. We are not liable to any damange or loss in anyway.

The fundamental arguments are compelling. The technical picture irresistable. Bulls have their say. Bears polish their claws.

One thing the candlesticks tell us: both sides are willing to stay on the sidelines until a clearer picture emerge.