Hi Folks.

It’s good to be writing this report again after a 3 month absence. I will be changing the format a little to primarily focus on technical patterns and trade opportunities rather than the fundamentals. That work should be left up to the economist and business writers. My view is to use ‘big picture’ fundamentals in order to understand the overall business mood then look for buy or sell opportunities based on the general direction this pressure is exerting on currencies, equities and commodities.

A great example of this is the USD, GBP and EUR. What we know is that based on current world economics; the EURO has been favored over the other two currencies. So my focus has been to favor the EURO in most trades. What I am now looking for is a shift in sentiment in order to correct overbought or oversold conditions.

To begin with, my focus will be on the FX market. As time goes on, I may consider publishing my technical view on some commodities. I hope this report and perspective provides you with fader for your own trading or at very least offers a comparison for you to bounce your own bias off of. I will publish at minimum once a week and will on occasion publish a bulletin if an important technical level has been attained or breached or if a significant technical pattern is developing on a common currency pair. If you would like to provide feedback, please do so as all comments are welcomed. (I will do my best to get back to all emails received, however some weeks this may not be possible) pcharlebois@tradingpostfinancial.com

This Week: How to trade the GBP/USD next week and month:As of late, the GBP/USD has been losing ground to virtually all of its counterparts and in particular to the EUR and USD. That’s right… while the EUR has been going up the GBP has actually been moving down. And in fact, if you have been watching the EUR/GBP pair, you would see that the EUR has been on an almost one-way tear against its neighbor from across the channel. What has happened in the last 20 days or so is that the GBP/USD has formed an extremely interesting triangle pattern and I believe the unorthodox trend-lines confining the price movement will soon let go and provide the next big move for this pair. As technical traders, the most import thing to do is to be prepared for this move and to take advantage of the technical levels.

One thing I always try to stress is; where can we enter positions to reduce our risk to a level we are both comfortable with and that our trading accounts can tolerate in the event of a loss or draw-down? As technical traders we need to establish where we believe we are wrong! This will keep our losses to a minimum in order stick to our planned risk.

Let’s look at the pattern and determine where these entries could be.
The pattern presented is a classic triangle. A classic triangle should have 5 distinct moves throughout (referred to in Elliott Wave terms as a-b-c-d-e) and should resume as a thrust in continuation based on the pattern that preceded it. As a result in this case my bias is towards higher levels. Also, when we have a triangle of this size compared to the preceding move we can take the view that the continuation thrust could/should equal the previous move in length, giving us the A-B-C move made famous by R. N. Elliott and his Elliott Wave Theory.

Now the problem with all patterns is there are often subjective views on whether certain patterns have completed or not and on this pattern it is a little hard to clearly assess if all five moves are truly complete. (One appears to have failed). Having said that, we may yet need to move through the triangle one more time and may finish the last leg somewhat lower than our current bottom. (These patterns are never perfect).

So, the trades can be taken in the following fashion to limit our loss if we are wrong.
• We could enter now with the current low as our stop. Target the upper trend line and beyond.
• Second option could be to wait for a break of the upper trend-line and buy on a dip-return to said line.

Now, remember what I said about knowing where we are wrong. If we break down substantially below the lower trend-line then we need shift our bias to bearish on this pair and use the failed assessment as an opportunity to now sell the currency pair. A break below this level would signal a potential return to the 2 month old bottom and expectedly beyond as the larger trend would now be fully engaged in downward momentum.

The trade in this case would be to sell using the lower trend-line (or perhaps the middle of the pattern) as a stop-loss area.

Both trades assume that the break of this pattern would result in a momentum shift and in theory, could produce a 300 to 500 pip movement. This provides a very reasonable potential risk reward of 1 to 3 or greater.

Cheers and good trading.
Pierre