Busted

Friday morning, 8.15, FED president Ben Bernanke officially announces QE2, dollar plummets 70+ pips one E/U in 2 minutes. What do you do?

1) Make the logical conclusion that more money means cheaper money, i.e. you sell USD, because E/U just made new highs and the trend shall continue.

2) Let E/U retrace to pre-announcement levels, buy it, quickly scalp 15 pips and be done for the day.

3) Sell E/U at the highs with a tight stop, knowing everything bounces.

4) Don't do anything, go eat breakfast and come back when the market calms down.

Here's the one-hour chart.



E/U sold off 200 pips after the announcement. First, people who were short got killed on the initial spike up. Then, people who went long got killed during the drop.

Usual market behavior? Probably not.
Surprising market behavior? Probably not.
Untradeable market behavior? Probably not.
The reality of trading? Yes.

After seeing the spike, I initially went short, then long after the retracement. I got out for +10 each time. Then E/U just got stuck and refused to go higher? Sign of something fishy going on there? I look at U/CHF moving higher, U/CAD moving higher and even U/J moving higher. I short E/U, boom drops immediately. I get out for +15 and call it a day. E/U then drops another 150 pips throughout the day, but I don't really care. It might as well have continued higher.

I talked about the divergence on E/U on Thursday, but I also said I wasn't going to short it right away. It was a good decision wasn't it? I waited for a move up, then shorted and got out very quickly. No need to have an open position during the day and stress about it at work. 20 pips = 2% for me, do it every day and you're up 40-45% a month.

One more thing. I did trade E/U on Friday, but not just E/U. Everyone is trading E/U now and the more people trade, the more volatility you'll see. I traded U/CHF and U/CAD as well, which moved less but certainly with less volatility. By trading instrument not everyone is talking about at the moment, you can go "under the radar", hence avoid the volatility. People say only n00bs trade E/U. Well, let me rephrase. N00bs who lose usually trade E/U :)

Now enough of this, let's look at what you could have done during the day. E/U first came to 1.4000, bounced 20+ pips, then bounced 40+ pips (however, I wouldn't have traded the second bounce up for sure), then bounced off the red moving average. Beautiful.



U/J had a textbook bounce off the hourly low. I don't trade U/J, but seeing this tells you one thing - someone wants to buy a lot of greenbacks!



Here's E/J, first look at the hourly chart. First, the trendline was broken and the blue line would have been your buy.



On M15 you see that we bounced 20+ pips up, exactly to the trendline, then continued the down move.



That's it, have a great weekend :)

Tyler

E/U break not convincing

Yesterday's break on E/U doesn't seem to be that convincing. Why? Because we made it all the way up to 1.4121 and currently are 100 pips lower. That's too weak in my book. Furthermore, we have some serious divergence on daily. But, am I going to short it now? Hell no :) I'll wait for the test of the highs and quickly scalp the bounces.



Today was kind of slow, I only identified two good trades. E/J first broke the channel then retraced and bounced off the support (this was yesterday indeed). Today, the highs/lows are holding and few bounces occurred. One thing is interesting here. Had you shorted when the trendline was broken (where the quotation mark is), you would have had 4 hours to get out at BE, or be stopped out later. Waiting 4 hours is something I just don't do. In and out, quickly.



U/CHF is still being pushed lower and today we had a resistance-turned-support situation.

Market dynamics

The market changes. It has a different behavior in the first 3 hours of the London session and a different behavior when NY opens. This shouldn't come as a surprise.

The intraday dynamics is as follows. If London opens with a strong move, the move would usually continue for around 3 hours, travel all the way to a significant S/R level and then bounce. Depending on many factors, such as volatility, volume, etc. the retracement might happen before the NY open at 8 am EST or later. Often, nothing happens between 6am and 8.30am. There are times in the trading day that work as triggers - London open, NY open, 8.30 when on red news days, options market open, NYSE open.

A successful application of our bouncing strategy requires that the trader observes a big part the move before attempting to trade the bounce. It is different when a slowly-moving low-volume rally approaches a resistance level during Asia session, it is different when heavy elephant orders are thrown at the market just after 9am, and it is different when you witness a 50+ pip move on E/U in 4 minutes at 8.20 pm during Asia session.

If you're following the market, you know that everyone is talking about E/U bouncing off 1.40 and retracing lower. Well. When everyone is talking about this and attempting this, what is the most likely scenario? Let's analyze:

1) E/U comes to 1.40, bounces 240 pips and breaks the rising trendline of a channel. Boom, everyone thinks short. What does E/U do next? Starts retracing to the trendline and people get ready to short. People do get short, place their stops above 1.40 and wait. E/U starts rallying from 1.3960 during Asia (!) session, breaks through 1.40 and takes out all stops until 1.4055. Big money is now heavy short, because they had to take the other side of the buy stop orders above 1.4055. Next move? E/U immediately drops 30 pips as we speak.

2) E/U could have indeed bounced off 1.40, and traveled down to some Fibo level. This would have been too easy though. If E/U goes down, it will be later on, after more people get long when they notice the break above 1.40.

Now why am I talking about this.

This was my thought process as I was watching E/U rally: 1) Next resistance is 1.40, then 1.4024, might short around there if we don't see any crazy moves. 2) E/U showing no signs of weakness when we are just below 1.40 and I know there are many stops above the resistance level. 3) E/U blasts through 1.40 and 1.4024 in three minutes, triggering all stops of people who were short from before. 4) E/U is at 1.4055, then it's slashed down 10 pips in 0.5 second. I go short and E/U drops another 10 pips. 5) E/U starts ranging I get out.



At the same time, G/U was rallying too, U/J was getting hammered and A/U was 30 pips away from parity for the first time in history. As I was shorting E/U, I shorted G/U too. I watched U/J rally, U/CHF rally (greenback weakness) and held both for +35 pips total. I got out at my blue take profit level.






Had the situation been different, i.e. no attack on stops, but a slow, continuous move toward the highs, I would have shorted around 1.40. But seeing this massive stop-hunting effort, I didn't. I waited until the price "puked out" and then shorted.

What happens next? I don't know. A lot of money was lost and a lot of money is now short. Chances are a bigger retracement will happen, and then a rally.

---

I'm sure many of you know that I trade NY mornings (7/8am - 9.30am) these months. I have made an observation that the market isn't very good for the bouncing/fading strategy around such a time of the day. The reason is that this strategy works best when you trade only the first bounce. That means you watch the move happen, and only trade the first bounce. The first bounce, however, almost never happens during these market hours. This doesn't make the strategy unusable, it only makes it unusable for me at the moment.

For this reason, I have decided to develop a new strategy tailored to the early morning hours on the East Coast. I will of course keep posting good technical trades that could have been taken during the day. I'm not sure what kind of strategy this is going to be yet, but since all working strategies take time to develop, don't expect miracles next week.

Tyler

Well well well

Today was one of those day when things just worked.

First, G/U bounced off hourly support and went flying.



E/U got many people wondering today (i.e. made them lose money), as everybody was shorting it after the hourly bear candle. Then Goldman came with a report about FED contemplating more QE and bulls ate all bears for lunch. Technically, we had nothing else than a bounce off the rising trendline.



E/J is continuing its rise in a channel. Nothing new.



E/G had a bounce off hourly highs. It didn't quite reach there, but the bounce was obvious.



-Tyler

Active markets are good

Surprisingly Monday morning was quite active. G/J bounced off the rising trendline again, then finally broke it. I missed the short, but got some pips on the bounce.



E/G continued its upmove, turning previous resistance into support and retesting it one more time.



-Tyler

Weekly recap

Let's quickly look at what happened last week. Monday was a holiday in the US, I didn't trade at all. On the other hand, Tuesday was pretty good, since it was the first US session after NFP so volumes and volatility were expected.

Now, G/J. NFP made G/J spike, then it completely reversed despite positive numbers - strong indication of a fishy nature of the move up.



Here's G/U. My personal opinion on this pair is that it is the most-manipulated instrument of all majors. One has to be very careful when attempting to scalp it, and closely monitor E/G as it has a great impact on G/U.



E/U was stuck in a range the whole week. First two trades would have been clearcut, the last one might have been been stopped out, depending on where your stop was.



U/CAD gave a major headaches this week. First, if you go back to my post from 8/25/2010, remember we were predicting U/CAD bouncing from the daily highs. Today the situation looks like this:



Had you held the trade until today (with a stop at BE of course), you would be looking at 350+ pips of profit (with a 20 pip risk). Quick look at hourly suggests a channel. The last two big moves down were during NFP and CAD employment figures, hence not tradeable on the short side.



E/G had nice bounces off the rising 4-hour trendline:



On the H1 chart, bounces happened too:



On daily charts, E/U, G/U, E/J and G/J have been consolidating for quite a while now. This suggests a big move might happen sooner or later so be ready. Also, I've heard talks of Japan planning on an intervention, so be careful with long yen positions. Take your profit quickly, don't let the market take it away from you (because it will)

-Tyler

Trades from Friday

Quick look at what happened last Friday.

E/J was stuck in a range for a while, then retested the hourly lows and finally broke out higher.



Similarly, U/CHF squeezed all shorts heavily and then broke out to the upside.



-Tyler

Yen is stronger than ever

We had three very interesting days this week. All yen crosses were pretty much in a freefall and the BoJ threatened with intervention. Probably empty words...

E/U has been caught in a range with the topside limited by 1.2725 with several strong bounces from there.



G/U also hasn't moved much. After the initial break below 1.5478, we haven't moved higher:



U/CAD looks like it has ended its rally. Where? At the daily highs:



And how? With a textbook double-top:



E/G hasn't moved much yet, just whipsawing:



And finally, let's look at the Yen. Daily lows at U/J, E/J and G/J got taken out and all stops evaporated. There were little bounces off those lows for 15+ pips, but one would expect this to bounce more.

U/J:


E/J:


G/J:


I got taken out on the bounces as well, pretty heavily.


-Tyler

Few trades from Thursday and Friday

The most important thing that happened on Thursday was the following headfake that cost many people a lot of money (including me this time). On M1, U/CAD broke support shortly after 7am and went down to 1.0248. From there, it rallied 250 pips in 9 hours. At the time of the fake break, M1 looked like this:



Today, H4 looks like this:



The reason is pretty obvious, it was a 61.8% Fibo bounce. Also we had divergence on the RSI (which I didn't notice at that time :\) This is suggesting upcoming USD strength. The markets confirmed this by heavy selloffs seen in E/U and G/U on Friday.

Moving on, E/G had a few nice bounces. The first long only went for +9 pips, but bear in mind that pips E/G are worth 1.55x more than pips in USD majors.



Finally, U/CHF broke the strong daily support at 1.0350. The break was one of the statement-making ones, over 100 pips in two hours. The support then became a resistance and we had a bounce for 15+ pips.



Finally they put up the price to the previous hourly support and sold off from there.



The weekly close on U/CHF was exactly at 1.0350 so we'll what happens next week. E/U will most likely head lower, along with E/G, judging from strong bearish candles on the weekly. Also, we have a double/triple bottom on U/J daily and a trendline that is begging for a break.

-Tyler

Stick to the strategy

Well, this morning was interesting. I woke up and G/U was up over 150 pips for the day approach previous high. Of course I sold it. It was fighting a bit, the market slowed down, but eventually sold off 25+ pips. This was pretty much it as nothing was happening until after 8am. And since a real man doesn't trade dead markets, I didn't do anything else.



Granted, I should was a bit inpatient with the G/U short as the second one was way better. The next trade was a long E/U after it showed a strong move after NY open. I covered around the previous high.





Then I left for work, but what followed was a textbook bounce from the previous hourly high.



Another one that I missed was a long on E/G. This was happening as I was already long E/U and decided to pass.



And finally, E/J had a solid bounce off support. I would have passed on this one probably, as it wasn't as oversold I would have liked it to be.



What did I learn today? First, don't trade dead markets. This was crucial to avoid any blind sucker plays before the NY open. Second, be smart. Even after seeing a strong breakout, price pulls back before continuation. There's no point jumping in too soon.

-Tyler

Waiting for PA confirmation

Tuesday morning has been interesting so far. I was looking at shorting G/J because its advance was very weak and it was approaching previous high that was also coinciding with a trenline. I didn't short it right away, but rather waited for a price reaction. The reaction came in the form of a very strong bounce. I got in short and exited at previous support:



A similar thing happened on E/J but the reaction a more subdued, because E/G was trying to go higher. I again waited to a reaction, I saw U/J selling off, E/U breaking down and got in short. Exit simultaneously with G/J.



During the day, U/CAD broke the ascending trendline, but 1) I missed this because I was at work and 2) I probably wouldn't have taken it anyway, because the move was rather unconvincing in strength.



-Tyler

Sunday night/Monday morning

We had an unusually active Sunday night and Monday morning this week. Not really sure why, but we already know that we don't trade dead markets, so activity is good. Let's look at some nice trades.

First, last night E/U faked a breakout to the downside and bounced off at 1.2736, I went long around there, because it was a previous important level, and we had a divergence on the RSI. There was also a possible short as it reached the upper trendline of the channel, but I was at work then.



U/J broke the trendline and went down without ever looking back. I didn't trade U/J but instead shorted E/J and G/J.



There were also multiple bounces above 133.00 on G/J. The first bounce was also a trendline bounce and the second was a previous support bounce.



Here's a textbook U/CAD bounce:



And a textbook E/J bounce:



Finally, this E/G bounce was good for 20 pips, but I closed it for -7, because I had to go to bed:



-Tyler