Week of May 11, 2015 overview and chart setups

The market is about to open in a few hours and it’s time to get set up with the upcoming week’s chart setup. Before we get started, the key figure released this weekend is the People’s Bank of China rate cut for the third time in six months as the economy sputters

A slowdown in China’s economy will affect the demand for Australian dollars as we are trading. How immediate and great is this effect? Perhaps there will be a market open shock, but I believe this is priced in already with the daily downtrend.

Starting off with the 4-hour chart, there are two trend channels in focus here.

AUDUSD 4-Hour Channels

For the short run, I am bullish on the this pair hitting the 0.8000~ price level re-testing the previous supply level before making its way down. Based on the COT report, AUD positions were covered so I simply leave my price target as a short-term projection.

Bit late to spot this divergence, but I still remain bearish regardless. Let’s start off with the divergence chart first.

EURJPY Divergence

As you can see, a divergence is a when an indicator such as the relative strength index divergences with the price movement. The price produced a higher high while the divergence produced a lower high. This is the first indication that the price will will turn around. Is it foolproof? Of course not, but it does provide an early indication to be backed by other price action and technical analysis methods.

Does history repeat itself? If so, these two charts should look very interesting. See if you can spot the the chart pattern.

EURJPY 4-Hour Against Daily

I’m not implying that history does repeat itself in this sense, but it shares a similar heads and shoulders pattern. Without going into the technical terms, let’s take a look at this from a psychological approach. The EURJPY pair experienced a period of continuous buying to the point of the first relative high. Once this high is reached, buyers closed out their longs before another wave attempted to push even higher. Price reached a slightly newer high before we see the first leg of sell-off. The next projected price movement can be up to an 100% retracement.

Although this chart pattern is apparent on the EURUSD pair, what makes the EURJPY a better sell? If you look over on the USDJPY pair, this pair has been in a range for quite a few days. It looks like the U.S. Dollar isn’t fairing well with the Yen. In other words, the USD is losing its strength against the Yen. If you have a bearish Euro with a weak USD, the move won’t be as pronounced as a bearish Euro with a bullish or strengthening Yen.

Finally, the NZDUSD is another trade I would watch out for. Depending on how your channel is drawn, you may have varying sentiments.

NZDUSD Channel

For this week’s chart setup, I remain overall bullish of this pair as it bounces back from the lower bound channel line. Is this trade too late to enter? It depends on your risk to reward ratio, but current projection is a 300 pips upside with a 150 pips possible loss. It all depends on how you handle the 1:2 risk to reward ratio.

 

 

 

 

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