2 confluence zones stand out strongly for the AUDUSD on the 4-hour chart:
From a risk-reward proposition point of view, it might be worthwhile to fade the downward equidistant channel visible in the daily-chart.
AUDUSD in tightening wedge
AUDUSD equidistant channel in daily chart
Multiple Time Frame Analysis is a very important technical study to master for FX trading.
The principle to follow in Multiple Time Frame Analysis is this: the chart in the higher time frame shows the larger picture or trend. It is stronger and will have influence on the lower time frame. It is therefore good practice to have a top down approach to analyze a particular chart.
As an illustration, let’s look at the weekly chart of USDX.
USDX Weekly shows a long tail doji resting on the top of a channel
From the chart above, USDX has a rally which seems to be defined by a price channel. Last week’s candlestick showed a long tailed doji star.
This two observations allow us to put together this picture:
As this doji star was on a weekly chart, we can see that it can be broken down into 5 daily candles.
5 Daily Candlesticks make 1 Weekly Candlestick
To continue our multiple time frame analysis, we recall that it is good practice to have a top-down approach. So lets start by doing the weekly analysis.
Weekly Analysis 15 – 19 February 2010
Last week’s candlestick ended as a long tailed doji star. It means that the weekly charts might predict profit taking although the daily charts could show a reversal pattern. As the doji star was on the top of the price channel, this reinforces the likelihood that the USDX might take a respite from its rally.
Daily Analysis
We cascade down to inspect the daily movement of the USDX in the same week. Candles show big swings and had twice 1 day reversals (see 16-17 Feb and 18-19 Feb), which simply reflect the market’s indecision.
Putting together the two analyses, traders could do the following:
Conclusion
The higher time frame will provide a clear picture of the prevailing trend as well as show strong boundaries. These are the support and resistance and will clearly dictate movement of less committed traders using the lower time frame picture. While currency traders are unlikely to be trading the weekly charts, the concepts and principles covered here are equally applicable to other pairing time frames such as the 1-hour/4-hour or the 15-min/60-min.
When the 1-hour and the 4-hour charts are paired, the 4-hour chart gives the larger and stronger picture. When the 15-min and the 60-min charts are paired, the 60-min chart gives the larger and stronger picture as well.
Pennant in upward channel
Pattern requires break of short blue trendline to confirm.
The CADJPY displays a formation that looks remarkably like a pennant. This is because of the ‘flagpole’ which tells us the strong upward momentum in its previous rally. This flagpole and subsequent side-way movements suggests a continuation action after profit-takers have been cleared and strong bulls take command.
Possible pennant in CADJPY
On the other hand, price remains resisted by an August 2009 level so upside is restricted until this level is breached successful.
Equidistant channel in 4 hour chart of CADJPY
In the 4-hour chart, an equidistant channel can be seen. The resistance of this channel is the resistance of this possible pennant formation.
Bank of Canada has kept its interest rate at a low of 0.5% since Apr 2009.
Considering Canada as one of the top 10 crude oil producers in the world, it is one of the currencies that is highly correlated to crude oil. Thus, the Canadian dollar or Loonie is also in the class of Commodity Currencies.
In view of its coming interest rate announcement on 19 Jan, there is a natural tendency to see how it might affect the Loonie and perhaps to make a profit on speculation.
First, let’s see a long term view of the Loonie (USD/CAD) as refer to the weekly chart below.
You will notice that the Loonie has been strengthening since last year i.e. USD/CAD has been falling.
Currently, we are within a support zone for USD/CAD and the falling wedge pattern is nearly formed. So it does look like a reversal of the current downtrend is coming.
Second, with reference to a 4 hourly chart, it shows us a different perspective.
It seems that there is a downward channel and the Loonie just bounced off a resistance line, following the direction of the trend channel.
Is there something which the chart is trying to tell us about the Big players’ bias on this currency pair? What will be the next direction of the Loonie? It could fall on 2 possibilities.
A) Channel Breakout
Should there be a channel breakout for Loonie, it shows that the falling wedge reversal pattern is validated , as shown on the Weekly chart. This will only be made invalid if Price hits below 2009’s low to parity (1 USD == 1 CAD).
B) Channel Follow-Thru
If Price tracks this 4 Hourly channel and follows thru, then the recent support / resistance line as shown has been a focus for most traders, thus, likely to push to 2009’s low or even to parity.
But then again, with the above analysis and anticipation, the outcome is known only when Price action is shown on the chart.
I believe we will know more evidently after the Bank of Canada makes its interest announcement today.
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.
An institutional trader told us once about his obsession – trendlines. He even boasted about how wonderful his software was because it had a magnet function, the kind where you could pin your trendline precisely to the tail or close of a candlestick.
Why this obsession? Because professional traders could not really forecast price movement. But with trendlines, they could make low risk, high probability bets. Put another way, trendlines define the boundaries of price movement by acting as support and resistance. And because the FX market was so technical, you could get it right if you saw the same trendline that others in the market saw.
If we applied that strategy to the USDJPY, then the story goes like this:
This observation is made simply by laying down the boundaries with 2 sets of equidistant channels and an additional trendline.
Dollar in downward channel although a reversal chart pattern is visible
Price takes the path of least resistance. So which one is more likely to give? Erwin and I are watching.
Which is harder? The channel resistance or the horizontal support?
USDCHF has broken out of a channel within a channel. We wait to see if a throwback is likely before a move to an extended level. Momentum is strong plus we will be looking at Fed rates this week.
USDCHF zones of movement and resistance
Chart patterns provide a good way to figure out the direction of the market. A good chart pattern offers the following clues to the trader:
All in all, its qualities are predictive, pre-emptive.
Let’s look at Aussie this 2 weeks to see if clues were left for traders.
From left to right:
What to look out for next week?
A horizontal channel reveals levels support at [E] that has broken on the down side. So the opening move of Week 51 could be a test of resistance at [E] and support at [F]. Price takes the path of least resistance so the integrity of both levels may provide clues for the middle of the week to come.
Aussie Dollar chart patterns
MACD High Probability Trades 
