Tuesday, 22 March 2011

Double Bottom/Top patterns- Recent Examples

I wanted to follow up on the USD Double bottom post with some very simple Daily examples. All of these examples were setups that I followed or traded over the past year or so. I am showing these not to pat myself on the back, but to illustrate how effective these patterns are as a risk/reward entry. Study some of these and learn the best way to enter these trades. I enter on a Daily close back below the double top/double bottom level or after a clear Daily reversal candle. Confirmation is key. Learn to sell into an emotional extreme and you place the odds in your favour. 

S&P 500 Daily: November 2010
This trade lead to a 50 point fall into the moving averages

USD- big picture Double Bottom Trade?

I wanted to share some interesting setups I am looking at in the DXY Daily Index. This is a classic "test" trade or double bottom pattern and represents a great low risk/high reward long trade. Often price needs to retest a climatic low point before a new trend can begin- this is what we are trying to exploit here.

The charts below show the DXY spot index and the DXY continuous futures. The spot index is testing its previous low with bullish momentum divergences in place. This is a buy IF we see a strong Daily closing candle back above 75.60/76 spot level. Note the ending wedge type pattern on the continuous chart. I am sure there are many traders who will be shorting or have shorted this for a perceived breakdown. This is exactly what we are trying to exploit because if there is no follow through to the downside, a powerful bear squeeze is likely to ensue. I know sentiment is at extreme bearish levels towards the USD currently but I don't have the open interest data.

Asian Morning thoughts- Short term caution

Morning All,

Last night saw a positive session in US markets with a strong gap up and the S&P testing the key 1300 level. I have been focusing on bullish base patterns and these have played out well thus far: http://swingtradersedge.blogspot.com/2011/03/s-bullish-patterns-developing.html. I now feel is the time to urge some short term caution for a few reasons:
i) We have had 3 consecutive gap ups with little intraday follow through. This is not indicative of a strong underlying trend
ii) Volume was less than 1bln on the NYSE. Again this is not indicative of a new kick off move
iii) Price is coming into key overhead resistance from 1305 to 1310.
iv) High beta indices such as the Nasdaq 100 are not following through

I do believe the bigger picture is bullish but here is the chance to lock in some of the recent gains. I stressed last week that successful traders need to be able to buy near the emotional extreme of a decline- this has played out well and now is the time to be cautious I feel.

S&P 500 5mins:

Nasdaq 100 5mins

The SPI broke out of a clear consolidation pattern yesterday afternoon which I posted. I thought we would get more weakness down to 4600 but this never materialised. We are indicated to open at 4694 and this is right into a big resistance zone. Similar with US markets, I feel short term caution is now warranted here. These resistance levels are:
4697/4713- an open gap
4720- 50% fib retrace

SPI 5mins:

ASX 60mins:

The bigger picture is bullish and fade trades should only be considered I believe for the most nimble of traders.

AUD is coming into some strong overhead resistance. There was no signal from yesterdays short setup late in the afternoon. I don't have a trade here and am still hoping for a pullback into the 60min moving averages to get long

AUDUSD 60mins:

In sum, I am turning cautious here. The intial move is coming into some strong resistance in the US and in Australia, and I am happy to get flat here and wait. I would be very careful getting short as there is no signal. I will post more charts of Asian indicies shortly.