Last week I focused on the forming Ending Diagonal on the EUR/USD and suggested that if the pattern was correct, there would be no subtlety in the move down once the top was in place. Indeed the assessment was correct and subsequently the pair has now fallen over 400 Pips in little more than two days. I heard it described as; it came down without touching the sides!

The next challenge is to now be alert to the next possibility of buying or selling depending on how the pattern will unfold. Let's address what is common following Ending Diagonals.

The name ending implies we have completed a substantial move and at least a temporary top is in place. So at the very least we should expect a total correction from where the pattern began forming. If we are also at the end of a longer cycle, then an even greater correction will take place.

The way to trade this is to expect a trading channel to form and to look at barriers on the way down and to Sell after Bounces as the move down corrects, reducing your position size as we approach lower levels below the Ending Diagonal pattern.

It will be at this stage that we will likely see a reversal that will either be a correction of the move down, or a new move up towards a potential double top or marginal new high.

So for now, sell the reversal off the bounce when a definable channel looks to have formed. For those of you that are impatient, you could consider a buy if you can identify when the currency pair turns to correct. Just remember, this is like trying to catch a falling knife; lot's of fun when you do it right, but plenty of blood when you miss.

Good trading!
Pierre

Last week, I wrote about a forming triangle and to look for a bottom in the GBP/USD that should/would provide a good risk-reward trade. Such a trade did materialize for over 200 pips (so far). My target on the GBP/USD is 2.01. Note that any move back into the Triangle should be seen as a reversal and that the overall trend has changed. At that point (a move below 1.9800), I would expect heavy selling and I would then join the bearish pack.

This week, it is very relevant to address the differences between a ‘Triangle’ and a ‘Wedge’ based on the ‘look’ of the EUR/USD.

The Misconception

In my interactions with students and trading partners, the term falling or rising ‘Wedge’ is very often used to describe two trend-lines that have such an appearance. What I have observed over the years about this is; that frequently the two trend-lines are valid, however the ‘Wedge’ pattern and what it represents is often miss-interpreted, and I think, used in too broad of a sense. What also occurs with these patterns is that some traders call all ‘wedge-like’ patterns ‘triangles’. By not discriminating between these patterns a trader must wait to observe what side the price action will exit, as without proper identification the price action can go either way as triangles and wedges (if correctly identified) produce price action in opposite directions.

The Opportunity

With better analysis, it is possible to increase the likelihood of identification and in doing so, provide better recognition of potential entry levels. As such, I like to refer to ‘Wedges’ as ‘Ending or ‘Leading’ Diagonals. I will attempt to explain the subtle but important nuances that separate the Diagonal from the Triangle in general terms with some references to Elliott Wave Theory as this study explains the patterns in very specific detail. (I’m only going to address the ‘Ending Diagonal’ today)

1. Firstly, why I use the term ‘Ending Diagonal’ rather than ‘Wedge’ is as the name implies, the pattern must be in the ending position of a trend.

2. It foretells a reversal (Triangles are continuation patterns)

3. It must come at the end of a long or exaggerated move (just following a small correction)

4. An ending diagonal will in all cases move in the direction of the aforementioned large move.

5. It should have a look resembling a wedge more so than a triangle

6. When the top/bottom is in place, there is absolutely no subtlety to the reversal and a swift retracement/reversal ensues.

7. On an ending diagonal the internal ‘Elliott’ wave structure is 5 waves that subdivide into 3 waves each. (This part can be a little hard to identify).

Based on the criteria above, there is a possibility that the EUR/USD is forming an ending diagonal. I don't like the structure of the first wave in the formation, however as much as it doesn't fit good guidelines; it can be counted to fit the possibility. The following waves fit the guidelines well, as does the overall shape and of course it appears in the correct position following a large and fast movement.
I believe that if the pattern is correct, we are just at the bottom of wave 4 and we need one more move of three waves up to re-test the highs for a completed 5^th and final wave. Once this happens, we should witness a very sudden and strong fall.

My bias is: Look for a return to the 1.60 area. From there, watch for a reversal candle on the one hour chart. If the pattern is correct this will signal that the top is in place.
Keep a close watch; Sunday, Monday, Tuesday

In the end, if I am wrong about the pattern, as I said earlier, the trend-lines are very valid and a break going the opposite way than originally expected provides in itself, a new opportunity for trading.

Pierre

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

Optimism for a dollar rebound that pervaded the currency market at the start of the year is fading.

Futures traders doubled bets against the greenback in the past two months, data from the Commodity Futures Trading Commission in Washington show. Citigroup Inc., Deutsche Bank AG and Royal Bank of Scotland Group Plc, which handle almost 40 percent of global foreign exchange trading, say the currency may slump to $1.65 per euro by October, from $1.5672 today.

While the dollar rose April 1 when UBS AG and Lehman Brothers Holdings Inc. said they're raising $19 billion to shore up their capital, it retreated for the rest of the week after Federal Reserve Chairman Ben S. Bernanke acknowledged for the first time that a recession is possible. Officials of the Group of Seven nations meet this week in Washington, and are unlikely to agree on a plan to boost the currency because rising exports may be the only blessing of a weak currency in a weakening economy.

The US economy lost 80k jobs in March, compared to the IFR Markets consensus of
-50k and IFR's own estimate of -15k. BLS revised February jobs lower to a loss
of 76k versus 63k previously reported. They found more job losses in January
too, making the first quarter average growth of -78k, the worst in five years.
The Dollar Index, which measures the currency against six of its main counterparts, tumbled the past two months after trading little changed between October and mid-February. It's down 5.8 percent in 2008, after dropping 8.3 percent in each of the past two years.

The G-7 -- the U.S., Japan, Germany, the U.K., France, Italy and Canada -- hasn't intervened in currency markets since supporting the euro in 2000. They are unlikely to buy or sell currencies to prop up the dollar after meeting April 11, according to Deutsche Bank, Citigroup and Bank of America Corp. in Charlotte, North Carolina.

TECHNICAL OUTLOOK – DAILY CHARTS

EUR/USD

Resistance: 1.5902 -all time high

Support: 1.5510

Sentiment: mildly bullish

GBP/USD

Resistance: 2.0190

Support: 1.9640

Sentiment: mildly bearish

AUD/USD

Resistance: 0.9200/0.9300

Support: 0.8885

Sentiment: mildly bullish

USD/JPY

Resistance: 103.65

Support: 98.80

Sentiment: mildly bullish

USD/CAD

Resistance: 1.0245

Support: 0.9865

Sentiment: mixed

USD/CHF

Resistance: 1.0355

Support: 0.9875

Sentiment: mixed

GPB/JPY

Resistance: 205.70

Support: 196.90

Sentiment: mildly bearish