27th – 29th August 2014 Forex and Commodities Update

EURUSD

EURUSDDaily

The EURUSD sell further accelerated when Draghi announced last Friday that he would like to call for action to spur growth by suggesting further stimulus for the Euro region. Do bear in mind; it is a suggestion and not a confirmation. Whatever it is, one thing is for sure, the Euro zone has not recovered from previous stimulus. I am skeptical of the stimulus being introduced immediately. This is because, Mondays gap was not impressive and subsequent price action does not suggest huge selling as yet. I am not saying it may not but it has not happen yet.

I personally feel that the EURUSD is oversold and we should see EURUSD moving sideways or trading back to the daily 21sma.

Mandate:

For those who are not comfortable buying EURUSD for the short term, stay with the main trend which is a sell and sell from established resistance areas. Places to sell are the 1.3302 – 1.3336 region or the 1.3425 region.

AUDUSDDaily

AUDUSD

AUDUSD fail to break 0.9242 twice in a row within 2 weeks. When price rejected 0.9242 strongly on 21st August 2014, I took profit on shorts traded at 0.9334. I am still holding shorts which we traded at 0.9440 as I believe the AUDUSD will not go up that high for this year.

Next week would be an exciting week for Aussie Dollar as we have Manufacturing PMI news coming out from China on Monday and RBA Statement on Tuesday.

Mandate:

Till then stay at the sideline and wait for the news to come out before we make any trading decisions. I have a sell bias but I need the overall fundamental to support my view.

 

GOLDDaily

GOLD

Gold thrives on inflation which means Gold can only go up if there is inflation. The beginning of Quantitative Easing marked the boom of the Gold. Let’s review the situation, US has been printing money and its almost ending it QE, Europe is still printing and so is Japan. However one thing is evident, the 3 large economies have recently experienced inflation below 2 percent. Financial Times printed out that, markets do not expect Euro inflation to rise at all in the next 5 years. This means we will not see strong gold.

Mandate:

Look to sell gold at established resistance areas like the 1316 region, 1367 region, 1393 region or 1532 region. Wait for bearish confirmation when price trade at those areas.

Morningstar-wikipedia

How to Read Candlestick Charts

Candle stick has been a part of technical analysis for a long period of time. The usage of candle stick trading has been traced way back to 1750’s. The pioneer of candle stick trading is none other than Munehisa Homna. Homna is often referred as “The father of The Japanese Candlestick Charting” dominated the Osaka rice markets with his uncanny ability to chart the rice futures using candle sticks. It is said that he had over one hundred winning trades in a row.

Homna discovered that although there was a link between demand and supply of the rice market, the market is also influenced by the emotions of the traders. This is because there were times when the market perceived a harvest as different from the actual. In 1755, Homna wrote San-en Kinsen Hiroku, the Fountain of Gold – Three Monkey Record of Money which was a book based in market psychology. In the book Homna mentioned that trader’s emotion plays a significant influence on rice prices. Thus, traders who understand emotions well would do very well to position oneself against the market.

He wrote “After 60 years of working day and night I have gradually acquired a deep understanding of the movements of the rice market. When all are bearish, there is cause for prices to rise. When everyone is bullish there is cause for the price to fall. He describes a bullish market and a bearish market and claims that within each type of market is an instance of the other type. This is what we know as trend and counter trend.

Homna is in studying weather patterns, market volumes as well as price to make decisions on his trades. If I were to take his winning compared to today’s profits, we are looking at Homna lifetime trading profits recorded at around a mind boggling figure of USD100 billion making Homna the most successful trader in history.

In my humble opinion, the father of modern candlestick is no other than Steve Nison. I believe if not for Steve we would not such an in-depth understanding on candle stick. Articles by Steve on candlesticks have appeared in numerous trading magazines. I will discuss Steve Nison’s materials at the end of the article.

Chart Pattern Trader

In this article I will discuss on the following topics:
a) Candle stick as a emotions indicator
b) How to read the meaning of candles
c) Type of patterns
d) How candlestick triumph over fundamentals
e) Further information sources

a) Candle stick as a emotions indicator
The very basis of candle stick is to portray the emotions of the market. Other price indicators are not able to fully give traders a visual feel of the market. To understand let me give you a quick walk through on how to read the 3 most used charting methods, namely the bar chart, line chart and finally the candlestick chart.

3 charts

Line charts are indicated with just a vertical line with its higher end indicating the high price and the lower end and 2 short horizontal lines indicating the opening price (left side) and closing price (right side).

The Line chart however does not have any high or low of the price but the closing price of the indicated time frame.

The candlestick chart is represented by a body and wicks. For a bull candle, the opening price would be at the lower bottom of the body whereas the closing price is at the higher end of the body. The high of the period would be the high of the upper wick whereas the low of the period would be the low of the lower wick. For easy representation, the standard colour for a bull candle would be a white candle and a bear candle would represented by a black candle.

When we group all the prices, we would be able to see the emotions of the market. This is illustrated in the following diagrams.

Bar Chart

EURUSDDaily bar

Line Chart

EURUSDDaily line

Candlestick Chart

EURUSDDaily

All the charts are showing the same daily price of EURUSD pair from January 15th, 2014 to August 26th, 2014. We can clearly see that the first 2 charts does not show anything but showing a bunch of lines showing prices going up and down. We have a clearer representation of the price with the candle stick chart as they are a bit thicker than lines and also the colour alone gives us an indication where the buying and selling started and most importantly where the buying and selling accelerated. When we are able to see things visually, things usually become clearer. No matter its only a single candle, double candle, triple candle or a group of candles, we are able to chart the emotions of the market. From point A of the candlestick chart, we could see that we see more black candles indicating that the market is in a bearish trend. In a nutshell, more white candles mean bull market whereas more black candles indicate a bear market. Thus no matter what market we study or trade be it the equities, foreign exchange, bond or commodity market, as long as it has a price to it, the emotions will show via the candles.

Candlestick Charting Explained

b) How to read the meaning of candles

To understand this topic, it is good to understand the singular candle patterns first. For discussion purposes, I would only discuss the bull candles.

3 candles

Big white candles here show there is a huge move in price towards the upside. Big candles here also indicate that volume is getting larger. Go and take a look at your charts, if you look carefully at the bull trend, very likely you would be able to see big white candles at those areas as highlighted in the diagram below.

EURUSDDaily big candles

Spinning tops are indicated by small candle bodies. Small bodies here mean that there is no momentum in the market. If it is found at the end of an uptrend, it means that the bullish trend’s momentum is dissipating. However this does not mean that the uptrend is over. Likewise, if spinning tops are found at the end of a downtrend, it means that the downtrends momentum is dissipating but not necessary over.

EURUSDDaily spinning tops

Finally the doji. Doji is characterized with the opening price and the closing price at the same area and it means that the market is tired. A doji appearing at the end of an uptrend means the market does not have the energy to continue its upside move. Doji appearing at the end of a downtrend indicates that market does not have the energy to continue its move to the downside.

EURUSDDaily doji

In the example above, only a close above the high of the doji would mean that the trend to the upside continues. Failure to do so would mean that traders tried to push the market higher but fail at the end as shown in the diagram above.

The next example, I would like to discuss about the combination of candles.

EURUSDDaily black candles after spinning top

From the chart above, we have an uptrend and leading to the uptrend we have big long white candles. At the end of the uptrend, the uptrend momentum dissipated. This is shown by the emergence of spinning top. A long black candle appeared after the spinning tops and that was the starting of the downtrend. In terms of momentum, what does this mean? In short the size of the body tells us the momentum or the participants in the market.

Apart from the body, the wicks also tell us a lot about the market momentum.

long legged spinning top

The candle above is a spinning top with long wicks at the bottom. This spinning top means that price traded low early in the session and later rejected the bottom. Such candles appearing at support area means that price is rejecting the bottoms and there is a good possibility that price may trade upwards next.

EURUSDDaily long legs

From the example above, before the long legged candles appeared we had long white candles which indicated the momentum is to the upside. The spinning tops with long wick further confirmed the upside momentum.

 Candlestick Chart Patterns

c) Types of pattern

Engulfing Patterns

Patterns are divided into 2 types, namely Bullish patterns and Bearish patterns. My favourite pattern is the engulfing patterns.

engulfing

Engulfing patterns are my favourite because it shows that the current momentum is bigger than the previous momentum. Engulfing patterns must be found at the end of trends. This means that Bullish Engulfing pattern is found at the end of a downtrend and Bearish Engulfing is found at the end of an uptrend. The bigger the engulfing candle, the stronger the momentum. Strong engulfing patterns usually are depicted by engulfing candles twice as long as the previous candle.

Bullish Engulfing

NZDUSDDaily bull engulf

The highlighted area shows a bullish engulfing pattern which appeared at the end of the downtrend. After the bullish engulfing pattern appeared, it marked the end of the downtrend.

NZDUSDDaily bull engulf part 2

The pattern however should appear at establish support area to be considered as established patterns. In this case, it was old resistance became new support.

Bearish Engulfing

NZDUSDDaily bearish engul

The highlighted area shows a bearish engulfing pattern which appeared at the end of the uptrend. After the bearish engulfing pattern appeared, it marked the end of the uptrend. The end of the uptrend is marked in red line which is a noted resistance area.

 

Star Patterns

The star patterns is divided into the Morning Star which is a bull pattern and the Evening Star which is a bear pattern.

star

Morning star is found at a downtrend. It is a bullish pattern which is made up of three candles. Normally a long bearish candle followed by a spinning top either colour or a doji which is then followed by a long bullish candle. For valid morning star patterns, traders will look for the top of the third candle to be at least halfway up the body of the first candle in the pattern.

Evening star is found at a uptrend. It is a bearish pattern which is made up of three candles. Normally a long bullish candle followed by a spinning top either colour or a doji which is then followed by a long bearish candle. For valid evening star patterns, traders will look for the top of the third candle to be at least halfway down the body of the first candle in the pattern.

The emotions of the star pattern is best explained in the diagram below:

Morningstar-wikipedia

Morning Star

NZDUSDDaily morning star

Evening Star

EURUSDH4 bear evening star

Technical Analysis using Japanese Candlestick Patterns

d) How candlestick triumph over fundamentals

I am a firm believer in fundamentals. However I do not trade based on fundamental news. First technical then fundamentals is the way to trade. Candlestick patterns are early warning systems before any fundamentals changes takes place. Price will often react first before news. This may be due to the fact that informed traders have an in-depth understanding on their instrument of trade and acting in advance. The diagram below clearly illustrates this idea.

EURUSDDaily fundamentals vs technicals

The resistance at 1.3929 was first established in 13th March 2014. Price then tested the resistance once again on 6th May 2014. At the closing price of 8th may 2014, the evening star pattern was formed indicating a sell trend is in play. During that time, there was no bad news coming out from the Euro Zone as yet. On 15th May 2014, Euro started its first bad news with weak consumer confidence numbers and later on Germany showing weak preliminary GDP on 14th August, 2014 and the latest news of Draghi suggesting more stimulus for Euro Zone creating the gap down in price on the 25th August 2014.

 

These fundamentals news serve as backup to our trade direction. However the news could not be digested as individual news but as a collection of news which reflects the whole fundamental situation. I believe the way to win big is to use technical to time our entry and fundamentals to prolong it.

The beauty of this is that all these candle stick are available for free on the multi terminal 4 (MT4) platforms which are available for free. So take full advantage of it.

e) Further information sources

If you are interested in candle stick analysis after reading this article I suggest you study from the father of modern candle stick, Steve Nison. For beginners, you should read the candle stick course. This book will provide you a good understanding to candlestick charts.

41ajoAzQgxL

This book explains the nitty gritty of candle stick trading which I find very useful. Other books written by Steve Nison is the Japanese Candlestick Charting Techniques and Beyond Candle Sticks.

Conclusion:

Candlestick are use mainly for reversal signals and less on continual signals. All the best in your trading.

 

 

Price Action for FX and Crude Oil for 18th – 22nd August, 2014

EURUSD
Possible, short term reversal. Buy EURUSD with target at 1.3425.
Long term view: SELL

AUDUSD
Looking to sell from top. Possible place to sell – Minor resistance at 0.9332 to 0.9366 and major resistance at 0.9407.

USDX
Possible, short term reversal. Sell with target at 21sma of Daily chart.
Long term view: BUY at support

Crude Light
Price rejected support area of triangle. If geopolitical risk continue. Buy at with target at 21sma of Daily chart with final target at 102.40.

Bullish Engulfing Pattern hitting 2nd target on EURGBP

EURGBPDaily

ON 27th July, I posted a EURGBP buy. For the mandate, please click here. We have since hit the second target of 0.7980 on the EURGBP. I would recommend traders to shift all your stops to one pip above your entry. So the worst case scenario if you do not hit the third target, you still make one pip. how nice is that. My final target is 0.8103. Happy trading.

EURUSD possible temporary bottom after first failure.

EURUSDDaily

After the first buy failure on 5th August, I took a 40 pip loss on the buy trade. August 8th closing however presents another opportunity for me to buy the EURUSD. I believe the EURUSD is just too oversold and we should be able to see a retracement. Do bear in mind that this trade is a short term trade. In the long term, I am still a EURUSD bear.

Trade Idea:

Buy at 1.3386 or 1.3432

Target is the 21sma

Stop Loss is a close below1.3331