Forex Breakouts, False or Legit? – EURUSD, USDCHF and USDCAD
|May 7, 2012||Posted by admin under Forex - EUR/USD, Forex - USD/CAD, Forex - USD/CHF||
As I look at my charts this mornings I notice several support/resistance levels broken. The EURUSD and USDCHF broke out this morning–with one of those breakouts appearing false and the other legit. The USDCAD also broke out several days ago but reversed shortly afterwords. Therefore, here are my thoughts along with what I am doing with these pairs….
Earlier today the EURUSD broke through support at a 1.2970, creating a new 3 month low at 1.2954. In recent hours though this has been significantly reversed, as the pair currently trades more that 100 pips higher than the aforementioned low.
This puts the EURUSD right back within the triangle pattern it has been trading in for the last 2.5 months. For those who are trading the chart pattern, the downside momentum still could continue, and stops are not yet in danger (in the event of a downside triangle breakout, stops are placed just above the upper trendline of the pattern). For those not in a trade, there is little reason to get involved (if swing trading) while the price is still within the pattern. A drop below recent lows or a move above resistance at 1.3275 will be required to get me involved.
The USDCHF has also been moving in a triangle pattern for nearly 2 months and earlier today it broke out to the upside aggressively. The breakout point of the triangle was 0.9190 and the early morning rally today peaked out at 0.9270.
In the time since that high was put in the pair has retreated back to the breakout area, therefore, this is not a false breakout (at least not yet). The price remains fully outside the triangle pattern.
One thing to note is the the EURUSD and USDCHF are inversely correlated. Based on this we will often see similar patterns (horizontally flipped) playing out, but each pair will provide different setups, risks and potentially even a different outlook. Therefore, we can pick and choose which pair looks best to trade based on the information provided by both pairs.
At this point in time, the USDCHF remains outside its triangle pattern while the EURUSD dove back into its pattern. Therefore, the USDCHF appears to have more legitimacy and for that reason I am long near the 0.9190. Stops are placed below the lower trendline of the pattern.
Another pair which has witnessed a false breakout is the USDCAD. This pair has not been covered much in recent months as it’s price action has been largely uneventful–moving sideways since February. At the end of March though the pair did break lower—trades were not advised due to the overall choppy nature of the pair.
In the days since the USD has climbed putting the the USDCAD back into the middle of the former range. Being predominately a trend trader, this pair continues to be one I prefer to avoid until a legitimate breakout occurs. A “legitimate breakout” would be a significant move beyond the current range (in either direction) followed by a correction which holds outside the current range and then begins to move in the original breakout direction again.
Cory Mitchell, CMT
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