The Sterling has made a worthy break and reversal. While momentum traders consider going long, last week’s resistance must be watch – any failure to support at this point may be considered a bull-trap for big trend bears.
4-hour trendlines for GBPUSD
The USDJPY is printing a potential wedge on the day chart as well as inverted head and shoulder in the 4-hour. It is critical to confirm with break of neckline or breakout of wedge.
Potential reversal patterns for USDJPY
Chart patterns are commonly found for almost any price charts. It is more visual when view using a line chart than candlesticks or price bar chart.
As each price bar forms, it may give the chartist a perspective in relation to the formations showed by the historical bars.
Today, we shall dissect a 4 Hourly chart of CHFJPY to understand how patterns can form and perhaps to take advantage of the formations for trading.
As shown above, it is evident that CHFJPY has finished a Head and Shoulders Pattern which is a Bearish Reversal of the previous Up trend. The Up trend happens to be at the ‘armpit’ of the Left Shoulder and Price break down the trendline, indicating the Head is formed. With the falling price, buyers wanted for an entry and attempted to push the price higher, thus forming a pullback.
But it goes to show that more are keen to sell than buy, and after several attempts to break above the up trend line, there is a sharp plunge which is forming the Right Shoulder.
On the same chart with the Head and Shoulders pattern, the keener eye might find more patterns within the Head and Shoulders!
It is easy when we analysis charts in hindsight, when the formations were already there. It is a challenge for us to make sense of the charts as the days goes by. But after knowing a possible formation is underway, you can be sure many chartists who see it will want to ride it.
What we see for CHFJPY is on a 4 Hourly chart, which the above patterns were forming as the weeks goes by. It also shows that when the bullish sentiments of the Big Boys faded, the bearish reversal can last for a long time before another big move comes.
It is difficult to figure where the Euro is going. An inspection of the daily and 4-hour charts reveal 2 possible scenarios.
Bearish flag
The daily charts suggest that the Euro may continue its downward move because of this continuation pattern. The flag is characterized by the flagpole and which suggests a lot of momentum. A body of the flag completes the pattern. This body is usually perpendicular to pole. A body that converges into a triangle is called the pennant.
For the flag to be valid, price remains within the resistance and support of the flag. It is ultimately confirmed when it moves downward and breaks the support level (see dotted line motion).
Daily charts print a possible bearish flag
Reversal
The 4-hour charts paint a slightly different picture that can be visualized as a bullish reversal. The Euro was range bound the past 2 weeks (last week of 2009 and first week of 2010). This week price made an upside movethat was higher that last weeks high. Action till now seems to suggest that a support has been formed. If the bullish picture is true, price will find a base and penetrate Monday’s high level. Otherwise, the downside move below support will support the bearish flag scenario.
Weekly high
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.
The charts show a potential reversal of fortune in the EURUSD and USDJPY.
The USDJPY hourly chart plots a double top that has broken its horizontal support. While this is traditionally a reversal chart pattern, confirmation has to come from another chart – the 240min. In this case, an upward trending support is clearly visible and this has not been violated.
A double top in the hourly chart shows resistance over 2 days whereas a trendline in the 4-hourly chart is a multi-week support.
Double top in the hourly chart
As for the Euro, a potential head and shoulder patten is now clearly visible awaiting confirmation by breaking the neckline. A break and throwback play is now the prudent strategy.
Inverted head and shoulder awaiting confirmation
If both reversals materialise, we are looking at a retracement move in the Dollar.
The Aussie completed a Head and Shoulder pattern and broke its neckline before Christmas. Now it is making a pullback move to test resistance. If the neckline makes a successful resistance, the H & S pattern will remain intact and its validity as a reversal pattern is confirmed. If the neckline is defied, there is a chance that the initial neckline break may be a bear trap and that Aussie will resume an uptrending move.
Aussie making pullback to test resistance of neckline
Big moves in the major pairs and crosses were made between Thursday and Friday (26 – 27 Nov 2009). This is a worthy incident to look at and learn from. Lets recall the incident:
From a technical point, there are signs of a risk aversion move in currencies prior to the sell-off but the charts also show confusion.
Let’s look at the GBPUSD.
In other words, was there a true panic and reversal? Has this been replaced by regret and remorse?
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CNBC 27 Nov 2009 – Dubai Debt Woes ‘A Blip’, Won’t Lead to Global Fallout: Strategist
CNBC 27 Nov 2009 – Dubai Stock Market Fear Has ‘Legs’: Dennis Gartman
Marketwatch 26 Nov 2009 – Japan finance minister: forex moves ‘abnormal’
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Strong resistance for Sterling
Was this a breakout? Is it a bear trap?
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:
Loonie reversal pattern displayed several clues
Together with the previous high at 102.00, we might see some resistance before price is able to clear.
FX is steeped in the use of Fibonacci levels. The A-B-C reveral pattern of higher-low is also a 50% retracement level.
MACD High Probability Trades 
