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GBPUSD Pivots and SSI Plummets
DailyFX.com -
Talking Points:
-4 currency pairs showing weakening ADX levels
-3 currency pairs showing weakening ROC levels
-GBPUSD pivots near channel low and its conviction rating is reduced from ‘3’ to ‘2’
The DailyFX Plus Breakout2 strategy is one of the more widely followed by traders. This piece aims to identify those markets where breakout conditions are prevalent, and thus a follow through of the breakout is more likely.
Volatility picked up after Yellen’s words of wisdom on Wednesday. However, the other indicators such as trend strength and SSI have softened giving us murky waters for the breakout strategy.
For example, trend strength as gauged through the ADX indicator is weakening on many of the pairs. Four of the currency pairs (EURUSD, NZDUSD, USDCAD, EURAUD) decreased to a level commensurate with range trading while none of the pairs increased from range levels to trend levels.
In ideal market conditions for a breakout strategy, we would like to see strong directional movements. Seeing a net change of four currency pairs move from a trend environment to range environment is concerning of a broad based breakout environment.
The Rate of Change (ROC) indicators are suggesting slowing trends as well as three pairs moved into the neutral zone (AUDUSD, USDCAD, CHFJPY). When you have directional trends slowing down, the likelihood of a follow through on a breakout lessens.
GBP/USD 4 Hour Chart
(Created using FXCM’s Marketscope charts)
The Sterling has been the darling for the past couple of weeks, which we have been highlighting in previous writings.
The SSI readings have flipped to extreme readings in both the GBPJPY and GBPUSD and have stayed there for the past few weeks as traders attempt to pick bottoms on the GBP. Thus far, the SSI signal has worked as the GBP continues its strong sell off.
When analyzing the technical situation of the GBPUSD, it appears prices may have found an intermediate bottom and the SSI traders may finally get this one right. So far, the Elliott wave picture from the July 2014 high has sold off in 5 waves. The blue 5th wave has nearly reached the lower Elliott wave channel.
This suggests we have an elevated possibility of a retracement higher above 1.5250, which represents the 23.6% retracement since the July 2014 high. 23.6% is considered the minimum retracement level of a countertrend move, so prices could push even higher. If they are successful pushing towards 1.5350, the behavior around the upper channel line will provide some clues as to the near term trend.
Time will tell what the path the prices will take, but a corrective move higher doesn’t bode well for the Breakout2 strategy when the SSI is giving an extreme bearish signal at near +2.
As a result of the weakening market environment for breakouts, coupled with a potential ending wave in the GBPUSD, the conviction rating for the GBPUSD was reduced from a '3' to a '2' rating. Likewise, the conditions for the GBPJPY and NZDUSD deteriorated and each of those pairs were reduced 1 step.
DailyFX Plus Breakout2 Conviction Chart for March 23, 2015
ADX | ROC | Volatility Expansion? | Sentiment Signal | Conviction | |
EURUSD | Range | Bearish | Yes | Bullish | 1 |
AUDUSD | Range | Neutral | Yes | Neutral | 1 |
GBPUSD | Trend | Bearish | Yes | Bearish | 2 |
NZDUSD | Range | Bullish | Yes | Neutral | 1 |
USDCHF | Trend | Bullish | Yes | Bearish | 1 |
USDCAD | Range | Neutral | Yes | Neutral | 1 |
USDJPY | Range | Bullish | No | Bearish | 1 |
EURJPY | Trend | Bearish | No | Neutral | 1 |
GBPJPY | Trend | Bearish | Yes | Bearish | 2 |
CHFJPY | Trend | Neutral | No | Bullish | 1 |
AUDJPY | Range | Neutral | No | Bearish | 1 |
EURAUD | Range | Bearish | No | Bullish | 1 |
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Last Week’s Conviction Report: GBPJPY Sentiment Sees Mores Buyers During Sell Off
Bold and italicized ratings above represents a change in the rating from last week. There were three changes last week (GBPJPY, GBPUSD, and NZDUSD).
As you can see in the chart above, the ADX and Rate of Change (ROC) are grouped together. Since the ADX doesn’t indicate direction, only strength of move, we want to couple it with a rate of change indicator.
When trading a breakout strategy, ideally we would like to see prices in a trend and moving. This would increase the chance of a breakout that would follow through. If prices are in a range and if the ROC is neutral, that indicates there isn’t prices are comfortable near the current levels until a catalyst creates discomfort for the price.
Ideally, we would like to see a directional move take place with expanding volatility. Expanding volatility can be measured through analysis of ATR range or perhaps volume expansion.
The fourth item is sentiment as read through FXCM’s SSI. The result of the “Bearish” means the SSI reading is > 1.22 and “Bullish” means SSI is sign up for a free trial if you don’t have a live FXCM account) and view the Speculative Sentiment Index section (SSI).
When taking this together and a conviction reading is assigned. It is important to understand the conviction reading is the opinion of the author and not a recommendation to trade, use, or not use the DailyFX Plus Breakout2 strategy.
A conviction rating of ‘3’ means the ingredients exist for a breakout market condition that the Breakout2 strategy enjoys. A reading of ‘1’ represents a mixed bag and that the Breakout2 strategy is more at risk of a market condition that doesn’t cater as well to breakouts.
For example, the GBPUSD was given a ‘2’ conviction due to an extreme SSI reading of +2.0. Though we have an extreme SSI reading, the technical picture suggests we may be under a counter trend retracement higher which could mean a sloppy move higher.
Therefore, the some of the conditions exist for a potential follow through of a breakout in the GBPUSD, if a breakout trade sets up.
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education
The DailyFX Plus Breakout2 strategy can be automated. If you wish for the trades to trigger automatically into your account, register for a Mirror account which provides you access to dozens of other strategies as well.
Follow me on Twitter at @JWagnerFXTrader.
See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.
Feedback? Email Jeremy at jwagner@dailyfx.com
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