FOMC Projections & An interesting day for cable today.

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Review of price action from a technical perspective with fundamental notes

I’ve noticed in intraday trade, the GBPUSD currency pair has been trading a trending move intraday, and almost invariably giving back more than 100% of that move in a given day. So the market might move up 40 pips in the morning, but by midday have gone down 60 pips. Or it might move down 35 pips in the  morning, only to go up 100 pips during the (UK) afternoon.

Today I captured the market behaviour with some technical studies, using a four hourly candlestick chart and a one hourly candlestick chart, some trendlines, which we will be calling a ‘quadrant’ and some moving average indicators.

Without referring to the news yet, I just want to look today at the price action and where it took the pound.

Figure 1, the 1 hour (H1) chart shows the price going up steadly, but in waves and correcting down to the bottom (dark) trendline, from the top (dark trendline).

The exchange rate has clearly ‘bounced’ off the bottom dark line, indicating a resumption of the upmove, if we take only this chart into account.

Figure 1 – H1 chart this morning

First, I noticed how strongly this channel bounced during the morning. This is a one hour chart.

If we broke it down to a half hour chart, we would see a ‘3 bar reversal’ for sure – that is that the newly formed candle has penetrated the highest high of the last three consequetively downmoving candles, a powerful reversal pattern.

If we imagine the trend channel divided further into 4 channels (rather than 2), by adding two more parallel lines at the half way point between the midline and the top and bottom of the channel, and from the top we label the ‘spaces’ quadrant 1, 2, 3 and 4, it is not hard to see that the price has entered into quadrant 3, from quadrant 4.

I have approximated these quadrants in figure 2, below.

Jimmy Young who runs a live trade room and daily trade review and ideas service, has previously taught that entering into quadrant 3 from quadrant 4, is effectively entering the ‘buyzone’. Likewise, coming down into quadrant 2 from quadrant 1, is effectively coming into the ‘sell zone’.

This makes sense intuitively, because if you imagine that the price is trading within these channels and are going from one channel to another in waves, a strong move from the bottom or top channel towards the middle is likely to be followed through from quadrant 2 into 3 (and perhaps down to the bottom of 4) or from quadrant 4 up to quadrant 3, and onwards and upwards into 2 (and perhaps to the top of 1).

Look at what happened by later on in the day…again this is in the H1 chart – I have redrawn in the trend channels roughly, including the two aforementioned lines. Now quadrants 1,2,3 and 4 can be seen clearly.

You can see that the market price for spot pound/dollar kept rising, up through quadrant 2 and then stalled about half way into quadrant 3. The price then collapsed (during an important set of (hawkish presumably) Federal Reserve announcements.

Figure 2 H1 chart by this evening

Could we have moderated for over-aggression using this H1 chart, and thereby been cautious about trying to reach the top of quadrants 3 or 4 in the long play on the H1?

The answer is yes, by considering the higher timeframe. In this case let’s look to the H4 chart.

NB. Jimmy Young taught this analysis method on the H4 chart – a first reason to be cautious of quadrant trading too expectantly on the H1 chart.

As can be seen, the trend and channel direction (slope) does not match that of the H1 chart displayed.

Although the overall trend seems to be up – and therefore, we would expect therefore that GBPUSD could continue to correct upwards (i.e. correcting mid-long term from the Brexit collapse move earlier this year) on this basis, on the H4 chart, we are clearly in a pattern right now of consolidation – of lower highs being posted, and lower lows. Again, the trend channel bears this out.

Over longer time periods, the trend is upwards on both charts according to moving average indicators, which perhaps gave the H1 some impetus for a bit of a run up the channel. The moving averages on the charts (figure 2 and 3) speak for the direction of the trend – apart from the short term average (blue), the dotted line, turquoise line, purple line and pink line in figure 3 are all travelling in an upward direction, although the turquoise has starte losing a bit of momentum (angle is getting weaker).

We have bounced off the top trend channel and are therefore heading DOWN in terms of the trend channel / quadrant though. Note how this is not confluent with what the H1 chart tells us. The longer term chart needs to steer the view in this instance, unless there is a clear ‘failure’ of the channel to the upside.

That blue line is key also. It is an 8 period moving average, and sets the near term trend and has started travelling down. This and the bounce off the trend channel, plus the fact that we are in quadrant 3 and heading down from quadrant 4 all serve as ‘connected dots’ to suggest that the GBPUSD pair is probably still consolidating.

Figure 3 H4 chart this morning

Figure 4 shows what happened during the news – FOMC economic projections and so on.

If you are interested in reading the statement, here is the 14 December FOMC statement

Clearly, the message was hawkish (i.e. suggestive of strength in the US economy, thus the dollar, and possibly hinting at an interest rate hike, or clearly, as we will can see by the big red candle, indicating selling of the pound and buying of the US dollar, market participants got that sense of hawkishness and the big players and intraday winners will have traded it).

What was happening on the H4 was a different story to H1, and a more powerful one…

As you can see, that little move into quadrant 3 in the H1 chart, in fact took the market right to the top of the H4 channel, from which a reversal candlestick pattern (shooting star / hammer type) can clearly be seen followed by the sell off right the way through quadrant 4, 3 and 2 and finally into quadrant 1.

But as if to catch unwary traders out, not without a test of the very high of the hammer candle (+1 pip for those who will have been disappointed today by having a terribly tight stop).

Figure 4 H4 chart by this evening

What to perhaps take from all this in terms of technical analysis and possible strategy.

Learning & Strategy (for educational and not advisory purposes).

  1. Check the H1 and H4 for the channel in which the prices appears to be trending currently. Look for confluence, otherwise the H4 should take precedence.
  2. Quadrant trade short: Sell a move from 4–>3 down to 2 or 1.
  3. Quadrant trade long: Buy a move from 1–>2 up to 3 or 4.
  4. Look for a reversal at the top of bottom of a channel.
  5. Hint: For the hammer reversal candle (the candle before the big downmove), rather than entering on the close with a stop just above the candle, wait patiently for a retrace to 40%, 50% or 60% of the hammer candle as a ‘pre-empt’ of the short, giving some room for stops that are too close to the high of the hammer to be hit, e.g. 12 pips above the hammer high.
  6. Entering at the 50% retrace of the hammer at 1.2710 with a 20-30 pip stop (1.2730 or 1.2740) would have allowed a 30, 60, 90, 120 or even 150 pip profit today.
  7. Short term averages like the 8 period simple moving average can give a clue as to the near term trend. Longer term averages, like the 100 and 200 can give an idea of the medium to long term trends.
  8. There was big news today for the dollar. Trading without a stop somewhere (a decent distance depending on risk willingness for the trade, but undoubtedly above the quadrant 1) could have led to a nightmare had the news gone the other way.

I trust this brilliant and yet simple analytical tool taught to me by a long term bank trader of GBPUSD, Jimmy Young, helps traders make more intuitive sense of the trending nature of markets.

Happy Advent Season,

Sam

 

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