FXstreet.com (Córdoba) – The dollar has continued to weaken versus the yen and briefly dipped below…
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Thursday was not very conclusive in Forex trading. The US Dollar, very strong performer recently, lost some ground versus several other currencies. European currencies in particular, and to a smaller extent the Japanese Yen, recovered some of their losses in relation to the USD. However, taking a step back, today’s action is only a consolidation within primary trends, and not a reversal. At least not yet.
Commodity currencies, on the other hand, moved to a different tune. All of them slipped again, especially the Australian Dollar and the New Zealand Dollar. They lost about 1% each, maintaining their downward trajectory. There was no specific news specifically affecting these instruments, which means that longer-term sentiment has definitely turned bearish. Even the potential short-term rebound discussed here yesterday did not happen.
On the hourly chart, the AUD-USD had started to form a possible bullish reversal pattern. A move above 0.9920 would have completed it, suggesting a rebound of some magnitude. While the price came close to this threshold, it failed to penetrate it and fell another 100 pips on the day. That particular set up is no longer valid and my buy order is cancelled. Of course, the price could bounce now, after finding support at the 0.98 handle, but I do not see suitable buying pattern. Have to wait for more price development.
On Friday, we have scheduled announcements, which are very likely to affect the Canadian Dollar. Inflation numbers, in form of the CPI, should create volatility. While not as potent as employment and central bank releases, this data receives plenty of attention from market participants and tomorrow should be no exception. I will focus on short-term trades at the start of the London session, primarily in the Dollar pairs.
Yesterday, we sold our swing trade in DB Gold Double Short ($DZZ), a “short ETF” that inversely tracks the price of spot gold, for a solid gain of 9% over a two-week holding period. Since the trade followed through as anticipated, we thought it would be helpful to share an educational technical review of why we originally entered the trade and subsequently sold when we did.
For several months prior to entering this trade, we had been closely monitoring the price action of SPDR Gold Trust ($GLD), an ETF proxy for the price of spot gold. Specifically, we were expecting $GLD to eventually break down below major horizontal price support around the 0 level. The trade idea was originally mentioned in this March 18 blog post, and then again on April 29.
The breakdown we were planning for finally occurred on April 12, which led to a massive drop of 13% over the course of just two days. But since the April 12 decline was so large, and because we run an end-of-day swing trading service, we were unable to immediately take advantage of selling short the breakdown in $GLD (or buying the breakout in $DZZ). However, we were not really concerned because we knew we would probably get a second chance.
Whenever a stock or ETF experiences a massive drop within a very short period of time, it will typically make a substantial counter-trend bounce shortly thereafter. When that bounce occurs, traders and investors who got stuck and did not sell for one reason or another sell into strength of the bounce, hoping to minimize their losses. It is this “overhead supply” that prevents the equity from moving higher in the near-term, which subsequently attracts the bears who start selling short.
The end result of all the selling into strength of the bounce is that the recovery attempt is usually short-lived. What happens next is that the price will typically head back down to at least re-test the prior low before stabilizing. There are exceptions, of course, but it is highly unusual for a stock or ETF to experience a huge plunge, bounce off the lows, and not subsequently fall back down to test the prior lows at least once. It is this knowledge that prompted our short sale of gold as it bounced into resistance of its 20-day exponential moving average, then started heading back down.
On the chart of $DZZ below, we have annotated our entry and exit points, which will make it easy to understand the concept above. Since our entry was into an inverse ETF, the price action is opposite of $GLD. Therefore, our entry was on a pullback from the highs, rather than a bounce off the lows:
As you can see, we bought $DZZ on May 1, after it gapped above the previous day’s high. When buying a pullback to support (or selling short a bounce into resistance), we always wait for price confirmation that the dominant trend is likely to resume. The confirmation we are looking for is either a big, ugly reversal bar or a substantial opening gap in the direction of the dominant trend.
The fact that we always patiently wait for such price confirmation is the reason we did not immediately buy $DZZ on its first touch of support of its 20-day exponential moving average (beige line) three days prior. Entering before the price confirmation occurs is always riskier because there is no confirmation that the counter-trend move is finished. Therefore, we happily give up a bit of the trade’s profit potential in return for a lower-risk entry point.
The initial protective stop was set at .49. We set the stop at this price because it was below convergence of the low of the pullback (intraday low of April 26) and support of the 20-day EMA. After the gap up of May 1, we did not want to see the price action break below that convergence of support, so we set the stop below that level, including some “wiggle room” below the exact price of the low.
Finally, as for the exit point, our target on this type of momentum trade is simply a retest of the prior swing high (or prior swing low if selling short). As such, we set a target price of .40 going into yesterday’s session (just one cent shy of the April 15 high). Gapping higher on the open, $DZZ neatly hit that target and we sold.
Although $DZZ could go on to set a new high from here, that was not the intention of the trade at the time of entry. Rather, we were simply looking to catch a substantial piece of the first move back in the direction of the dominant trend. Furthermore, the odds of $DZZ going to a new high are much lower than the odds of it simply going back to retest its prior highs because now there is resistance of a major swing high (support of a key swing low in $GLD).
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Forex – Dollar mixed as data points jump into focus
Forex – Dollar mixed as data points jump into focus. By Investing.com | Forex News | May 16, 2013 01:03AM GMT | Add a Comment. Investing.com. Article. Tweet. Investing.com – The U.S. dollar traded mixed against its major rivals during Thursday's Asian …
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