The Australian dollar has remained trapped in a sideways trading band for one year and there is little sign of a strong change in the trend. » Read More
The Shanghai Index consolidation retest of the uptrend was stronger than expected. » Read More
The Nikkei 225 dropped quickly when the first announcement of Donald Trump's victory was in Asian trading on Nov. 9, following the U.S. election and set the tone for other world markets. The dip briefly retested the support level near 16,200 and then rallied quickly.
But the Nikkei has since resumed its breakout uptrend, highlighting two powerful breakout patterns.
The first pattern is the double bottom pattern. This is created by the low near 14,865 in 2016 February and again in June. This chart pattern is used to set a projected upside target near 20,347.
The double bottom pattern is also sometimes called a W pattern. The distance between the base of the pattern at 14,865 and the peak of the pattern near 17,613 is measured. This value is then projected upwards above the W peak to give the long term upside target. This target is near 20,347.
The breakout develops in two stages. The first target is a rebound from support near 14,865 to a peak of the W pattern near 17,613. This level was achieved and as expected there was some consolidation around this. The current breakout is moving towards the long term target near 20,347. The next minor consolidation band resistance level is near 19,000.
The US election is not as scary as some gold bugs imagined. After a fall, and rebound rally, the gold price resumed its downtrend. Weeks ago we asked who stole the gold? Now we know the answer.
We re-assess the extent of the damage and the now limited potential for recovery.
We start with damage assessment. The fall below the historical resistance and support level near $1,290 is critical.
The rally was a dead cat bounce, and yes, we were caught on the wrong side of it.
The rebound rally in gold is well established with a move above $1,290. The upside target is near $1,350.
It's good to see the gold uptrend continuing but the upside target delivers only 4.65% profit. Rather than trade gold there are more effective and profitable ways to trade this rebound. Gold's companion, silver, has similar characteristics but offers a higher return for the same behavior.
Silver lags the gold price behavior. Silver has a resistance level near $18.75. This is the equivalent to the $1,290 resistance level on the gold chart. Silver lags gold so the silver price is only just moving above resistance near $18.75.
A breakout at this level has a target near $21.00. This trade offers a 12% return compared with a 4.65% return from gold for the same price behavior move.
Silver has a longer term upside target of $26.00. That's 36.8% from the current price near $19.00.
Silver is slower to move but it has more room to move and this delivers better profits. Note the silver price is shown in cents.
The first resistance level is near $18.70. This was decisively broken. The price tested the weak resistance level near $21.00 but then collapsed below support and tested support at the lower edge of the long-term GMMA.
The upward-sloping triangle pattern on the Aussie chart graphically illustrates the conflict between supply and demand for the currency.
The pattern is formed with a horizontal resistance level, which can considered as a measure of supply. Price fails to move above this resistance line as the supply of sellers overwhelms the demand from buyers.
The second part of the pattern is an upsloping trend line, which shows the changing levels of demand. The line slopes upward because buyers enter the market more aggressively to take positions as the price falls and, worried about missing out, they bid higher to get a position.
The result of these two influences is an upsloping trend line. In equity markets this is a powerful measure of crowd psychology. It has the same function in currency markets, but not quite a powerfully because many currency traders are forced to take the opposite side of their clients' transactions, irrespective of their view of the market direction.
However the pattern remains a strong predictor of upside breakouts. The depth of the base of the triangle is measured and this valu projected upwards above the resistance line to set an upside target. Again, this method is reliable with equities, but applied with caution in FX markets.
The Brexit and Janet Yellen's indecision on rates have been digested by the market. Now, the prospect of either a Donald Trump or Hillary Clinton victory in the U.S. election isn't seeming to induce any jitters in the dollar index.
The Brexit has proved more difficult and complex than imagined when Brits went to the polls, and the dramatic drop in the pound was evidence that the market was beginning to understand the consequences of the referendum decision. However, the drop in the pound was not matched by a dramatic rise in the dollar index.
It is inevitable that U.S. interest rates will rise but the timing remains a subject of speculation. But apart from some small, short-term gyrations, there is no substantial impact from Yellen's statements. The real surprise will be when decisiveness overrides indecision but the dollar index chart suggests this is not a high probability in the near future.
As a result, the dollar index will continue to trade within a well-defined trading band. The first key feature on the weekly chart is the support and resistance levels. The support level is near $0.93 and was tested multiple times in 2015 and most recently in May 2016, dipping below but quickly rebounding. This has been a defining support feature since late 2014.
Some patterns of price behavior repeat and we cannot explain why this happens. However the repeated pattern opens the way to profitable trades. The euro-dollar chart shows a pattern of trend collapse that puts the downside target near 1.05.
The weekly chart shows two parallel up-sloping trend lines the help define price activity between a very broad trading band. The lower edge of the trading band is near 1.05, while the upper edge is near 1.145. It's not unusual to see a pattern of rally and retreat between these types of trading bands.
What is different with the euro-dollar is the well-defined uptrend line. The first line defined price activity for 6 months. The break below the trend line moved quickly to rest support neat 1.05.
The second trend line is parallel to the first but this is coincidental. It's the nature of the price activity which is more important. The second trend line also lasted 6 months before the price dropped. The breakout was different with a rebound that used the trend line as a resistance point. The recent pullback towards 1.10 suggests that bearish pressure is building on the euro-dollar. A move below the recent and temporary support level near 1.09 will confirm this bearish pressure. If this develops, then traders will watch for a rapid retreat to near 1.05.
Who stole the gold? The yellow metal's dramatic fall from $1,340 to below $1,260 is a break-and-enter theft on a grand scale.
It's going to take a while to find out who stole these profits from open long positions. But what's more important is to assess the extent of the damage and the potential for recovery.
Let's start with damage assessment. The fall below the historical resistance and support level near $1,290 is critical. It would be reasonable to expect that this level would provide support for any retracement but instead gold fell straight through this level. Chalk one up for the bears.
The uptrend with gold was well defined using a Guppy Multiple Moving Average (GMMA) indicator. The long-term GMMA was well separated and this generally shows strong buying support from investors. The upper edge of the long term GMMA was a little above the historical support level near $1,290. The fall below the upper edge of the long-term GMMA is not good. Chalk another one up for the bears.
The outlook for oil prices remains bullish, both on the chart and in the economy.
World economies still run on oil. The U.S. economy may run on domestic shale oil, but China remains dependent upon imported oil.
West Texas oil sets the benchmark. The outlook for oil remains bullish, the chart confirmed with the reaction rally from near $38 and the retest of historical resistance near $48.
Three features have helped confirm the bullish outlook on the chart: the Guppy Multiple Moving Average relationships, the confirmed chart pattern and the history of support and resistance trading bands.
The first feature is the GMMA relationships, which are showing a classic breakout pattern.
The GMMA pattern of trend breakout consists of three parts: First is a rally that tests the value of the lower edge of the long term GMMA. This happened in June of 2015. The second part is a breakout above the upper edge of the long term GMMA. This developed in June of this year. The third part is a retest of the support levels followed by a rebound.
The short-term GMMA briefly dipped below the value of the long term GMMA. However, the price rebounded rapidly from the historical support level near $38. This behaviour confirmed the classic GMMA trend breakout pattern.
The desktop computer revolution more than 30 years ago brought technical analysis and charting to the masses - the first charting packages were simple but they were a massive advance over what could be done by hand.
Over time, charting analysis programs have become both more sophisticated and easier to access. Charting has shifted from stand-alone programs to being integrated into many trade execution platforms and even the most basic of free online programs and brokerage-provided software include 30 to 50 technical indicators.
The result is that more people are dabbling in technical analysis without really understanding what is involved, because the pace of education has not kept up with the pace of change.
It's more than just not understanding how technical indicators are used, this very amateurish approach also includes the misplacement of trend lines, support and resistance levels. This is not helped by the popularity of some software that claims to automatically plot these lines.
These points are significant because moves above or below these levels are used as triggers for trade entries or exits. Getting the position correct is essential for trading success, and ignorance can be exceptionally dangerous and expensive in the financial markets.
A case in point is the line chart of the dollar index with a downtrend line. A respected TV financial commentator told viewers in Australia recently that the dollar index had broken out from the downtrend and the US dollar was poised to go higher.
Back in May, we set a downside target for the dollar/yen at 100. That target has been achieved despite the optimism from Prime Minister Shinzo Abe.
The way in which that target was achieved provides some guidance to what may develop next. There are two dominant chart features on the dollar/yen chart and they define the potential future price action.
The first feature is the powerful down sloping trend channel. From February 2016, the lower edge of the channel has provided a strong support feature. The upper edge of the channel provided a resistance level.
This pattern suggests that dollar/yen has a high probability of reacting away from resistance currently near 103 and retesting the lower edge of the trading channel, currently near 95. That's a particularly bearish outlook. It's theoretical and needs to be verified against previous price activity.
It's also important to note that a breakout above the upper edge of the trend channel signals a change in the direction of the trend. This change may include a consolidation sideways movement, or the beginning of a new trend. However, this is currently a lower probability outcome.