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My weekly stock market summary is now available on Investopedia, providing an outlook on the major index ETFs–SPY, DIA, QQQ and IWM:

May 18, 2012 Market Summary

Markets continued to decline this week, erasing most gains seen since the middle of January. For the first time since January 18, the S&P 500 traded below 1300, a pivotal support level, and the last vestige of hope for the bulls. If significantly penetrated, it would signal that this is a bear market and any short-term bounces are likely to be hiccups in a longer-term decline. Contrary to prior weeks when the index ETFs were not confirming each other, this week, all the major index ETFs fell and are very close to pivotal support (as mentioned in the S&P 500) or have already moved through it. This means the hope of a major rally is greatly diminished, although each individual ETF presents its own unique opportunities and risks.

Continue Reading: http://www.investopedia.com/stock-analysis/cotd/SPY20120518.aspx#ixzz1vFrdOxYO

Regards,

Cory Mitchell, CMT

14 Elliott Wave Trading Insights You Can Use Now
Triangles offer an important piece of forecasting information 
May 14, 2012

By Elliott Wave International

There’s no shortage of books about trading these days, and you could read for months before you come across one that might apply to your trading style.

The free 45-page eBook The Best of Trader’s Classroom is specifically for Elliott wave traders and saves you time in getting the knowledge you want.

It’s written by Elliott wave trader Jeffrey Kennedy: he had individuals like you in mind when he said

I began my career as a small trader, so I know firsthand how hard it can be to get simple explanations of methods that consistently work. In more than 15 years as an analyst since my early trading days, I’ve learned many lessons, and I don’t think that they should have to be learned the hard way.

The Best of Trader’s Classroom offers 14 trading insights that you can use now.

Consider these examples of what you’ll learn:

• Use bar patterns to spot trading setups
• Use the Wave Principle to set protective stops
• Identify Fibonacci retracements
• Apply Fibonacci ratios to real-world trading

Jeffrey also discusses corrective patterns which includes the triangle formation. Here’s an edited eBook excerpt:

Triangles are probably the easiest corrective wave pattern to identify, because prices simply trade sideways during these periods. [The graphic below] shows the different shapes triangles can take.

….triangles offer an important piece of forecasting information — they only occur just prior to the final wave of a sequence. This is why triangles are strictly limited to the wave four, B or X positions. In other words, if you run into a triangle, you know the train is coming into the station.

Jeffrey goes on to provide three real world examples of the triangle price pattern. Here’s one of them with his accompanying commentary.

[The chart above] shows a slight variation of a contracting triangle, called a running triangle. A running triangle occurs when wave B makes a new extreme beyond the origin of wave A. This type of corrective wave pattern occurs frequently in commodities.

Learn more about the 14 trading insights that Jeffrey Kennedy presents in The Best of Trader’s Classroom. This chart-packed 45-page eBook has a $59 value — but you’ll get FREE instant access by simply joining Club EWI. Membership is also free and it just takes a minute or two to sign up. There’s no obligation after you join. Just follow this link for your free download of The Best of Trader’s Classroom >>

Stock and Commodities Outlook

In a recent Oil and Gas Investments Bulletin I looked at the relationship between commodities and stocks.

Moving in virtual lockstep over the last few years the two asset classes have recently decoupled. In this article I explain what I believe the decoupling implies and ultimately where I think it will take the stock market (S&P 500)….

Read the article here: The Relationship Between Oil and Stocks—and How to Trade It

My theory is being put to the test right now as 1340 is tested in the S&P 500.

3 Questions to Ask of Your Trading Plan

Being honest and open with ourselves is one of the quickest ways to accelerate our trading progress. I remember when I first started trading on a trading floor I created a fantastic plan—based on my research and testing it was sure to produce. I started using it and it worked as anticipated, unfortunately I seemed unable to actually trade it as planned.  I knew it worked but couldn’t find the discipline to make it work for ME! The floor manager asked me about the new strategy and I explained all the great features of my plan. Defending my work I argued it was a solid plan which would produce big gains. He simply said, “Oh yeah, how is that working out for you?”

Unfortunately it hadn’t worked out very good–while the plan worked in theory I was  unable to implement it and thus it didn’t make money for me.

This is a pretty common problem especially when trying to learn from someone else or purchasing strategies/trading systems. In a recent article for Investopedia looked at 3 questions we need to ask of our trading plan to make sure it is actually something that be implemented based on our personal tendencies…

Read the article here: 3 Questions to Find Your Trading Plan

You have put in the work creating a trading plan or possibly spent money on supposedly great strategies, but you still cannot seem to turn a trading profit. Or maybe you are starting out in trading and investing and want to be cautious before you start putting real money on the line. No matter what level you are at, before you trade – or if are already trading and struggling – you should have a trading plan. That plan needs to be tailored to you and your needs; a plan that is not will likely result in a drain on your trading account.

The following three questions can save you a lot of grief. Run through these questions during your planning stages to make sure your plan will serve you well. If it cannot pass this three question test, it should not be used.

Read more: http://www.investopedia.com/articles/basics/12/3-questions-to-find-your-trading-plan.asp#ixzz1uxOHz8Ba

Other Reads

In terms of tutorials you may wish to check out some other Investopedia articles I recently wrote on using software to aid in the trading process:

Software Summary: Finviz.com Stock Screener

How to Spot and Screen For Chart Patterns with Finviz

Regards,

Cory Mitchell, CMT

My stock market summary and outlook which looks at 4 major stock market ETFs (SPY, DIA, QQQ and IWM) is now available on Investopedia:

May 11, 2012 Stock Market Summary

After a sell-off last week, this week prices managed to stabilize in the major index ETFs. The prior correction threw up warning flags as several support levels were broken, but as we close out the week, the price has managed to climb back above those support levels, indicating this rally may not be over yet. That does not necessarily mean to go on a buying binge, though. When price action occurs like what we have seen over the last two weeks, there are reasons to be both bullish and bearish; therefore, risk management becomes crucial. In each of these ETFs, there are important levels to watch, which can help establish entry points and control losses.

Continue reading: http://www.investopedia.com/stock-analysis/cotd/SPY20120511.aspx#ixzz1ubAYprH1

Regards,

Cory Mitchell, CMT

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….

EURUSD 

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.

USDCHF

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.

USDCAD

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.

Regards,

Cory Mitchell, CMT

Looking to find more forex trades in less time? Check out the video below…

———–

For the past year, one of the Forex trading community’s most seasoned trading “veterans” has been working diligently in his ”trading lab” trying to solve the #1 request his Forex trading students from all around the world have been asking him for:

• “How can I make MORE money in LESS time, even if I’m not a technical Forex ‘geek’?”

To do this properly, he had 2 big challenges:

1. How to shorten the time needed to actively find & manage the highest probability, lowest risk trades…
2. How to give you total control to manage these trades to completion, so your portfolio is protected at all times…

After a LOT of research and testing, he’s finally ready to show you what he came up with — a way to MULTIPLY your profit potential in these highly lucrative markets in 60 seconds or less of active trading…so he recorded a brand new presentation that reveals his discovery here…

The $20,000 Secret Weapon

The “secret weapon” behind his discovery is a custom piece of intelligent software that he paid over $20,000 to develop that can predict with a high level of accuracy which way any of the 6 major Forex pairs are headed in the next 8 hours…

It does all the “hard work” of finding the best trade setups, saving you hours of analysis…but then gives you total control to place and manage the trades yourself so your portfolio is always protected from risk.

And from what I’ve seen, no one is trading like this (yet)…

No, it’s NOT a “robot”… it’s NOT an “expert advisor”… it’s NOT even a “plug-in”…

It’s a complete, step-by-step approach to trading that’s probably unlike anything you’ve seen before.

He reveals it all in his new trading lab discovery presentation here…

It’s awesome, and it’s something anyone can do, regardless of your experience. Plus, it easily fits into your busy schedule because you really only need 60 seconds here and there throughout the day to place and manage your trades.

Good Trading,

Cory Mitchell, CMT

p.s. This presentation will only be online for a short time in order to get your feedback on this discovery, so if any of this interests you, make sure you watch it here ASAP…

Are These 4 Emotional Pitfalls Sabotaging Your Trading?

[Originally Published] August 13, 2009

By Jeffrey Kennedy

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report, How to Use Bar Patterns to Spot Trade Setups, free.

[Emotional Pitfalls:1]

To be a consistently successful trader, the most important trait to learn is emotional discipline. I discovered this the hard way trading full-time a few years ago. I remember one day in particular. My analysis told me the NASDAQ was going to start a sizable third wave rally between 10:00-10:30 the next day… and it did. When I reviewed my trade log later, I saw that several of my positions were profitable, yet I exited each of them at a loss. My analysis was perfect. It was like having tomorrow’s newspaper today. Unfortunately, I wanted to hit a home run, so I ignored singles and doubles.

I now call this emotional pitfall the “Lottery Syndrome.” People buy lottery tickets to win a jackpot, not five or ten dollars. It is easy to pass up a small profit in hopes of scoring a larger one. Problem is, home runs are rare. My goal now is to hit a single or double, so I don’t let my profits slip away.

Since then, I’ve identified other emotional pitfalls that I would like to share. See if any of these sound familiar.

[Emotional Pitfalls: 2]

Have you ever held on to a losing position because you “felt” that the market was going to come back in your favor? This is the “Inability to Admit Failure.” No one likes being wrong and for traders, being wrong usually costs money. What I find interesting is that many of us would rather lose money than admit failure. I know now that being wrong is much less expensive than being hopeful.

[Emotional Pitfalls: 3]

Another emotional pitfall that was especially tough to overcome is what I call the “Fear of Missing the Party.” This one is responsible for more losing trades than any other. Besides overtrading, this pitfall also causes you to get in too early. How many of us have gone short after a five-wave rally just to watch wave five extend? The solution is to use a time filter, which is a fancy way of saying wait a few bars before you start to dance. If a trade is worth taking, waiting for prices to confirm your analysis will not affect your profit that much. Anyway, I would much rather miss an opportunity then suffer a loss, because their will always be another opportunity.

This emotional pitfall has yet another symptom that tons of people fall victim to chasing one seemingly hot market after another. For instance, metals have been moving the past few years so everyone wants to buy Gold and Silver. Of course, when everyone is talking about it is usually the worst time to get into a market. To avoid buying tops and selling bottoms, I have found that it’s best to look for a potential trade where (and when) no one else is paying attention.

[Emotional Pitfalls: 4]

My biggest, baddest emotional monster was being the “Systems Junkie.” Early in my career I believed that I could make my millions if I had just the right system. I bought every newsletter, book and tape series that I could find. None of them worked. I even went as far as becoming a professional analyst guaranteed success, or so I thought. Well, it didn’t guarantee anything really. Analysis and trading are two separate skills; one is a skill of observation, while the other, of emotional control. Being an expert auto mechanic does not mean you can drive like an expert, much less win the Daytona 500.

I am not a psychologist or an expert in the psychology of trading. These are just a few lessons I’ve learned along the way… at quite a cost most times. But if you are serious about trading, I strongly recommend that you spend as much time examining your emotions while you are in a trade as you do your charts before you place one. What you discover may surprise you.

For more information on trading successfully, visit Elliott Wave International to download Jeffrey Kennedy’s free report, How to Use Bar Patterns to Spot Trade Setups.

Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI’s premier commodity forecasting service.  

If you have a questions about the analysis see the How to Use the Analysis post. If that does not answer your question, then please leave a question or comment at the end of the analysis.

AUDUSD Analysis — Multiple Time Frame Analysis – May 4, 2012

Cory Mitchell, CMT

Recent Events: After creating a higher high on April 27, on May 4 we seeing a lower low as the pair trades below 1.02—a level not seen since January.

AUDUSD Analysis – Long and Medium-Term

The weekly charts shows the trendline–which began in 2009–does not intersect until very near 1.0050. From the long-term perspective this remains a bull market, but as the white highlighted area shows, this correction is becoming quite complex

AUDUSD Weekly Chart with Trendlines and ATR

The green line on the chart marks the commonly used trendline approach, and as indicated intersects bear 1.0050. The pink parallel lines signifies something different. The lower pink line connects the bottom of wave 2 to the bottom of wave 4. The upper pink line runs parallel to this line and is placed above the top of the wave 3. This channel is meant to provide a guide for the move into wave 5 (higher) over the long-term.

AUDUSD Analysis – Trading Term Outlook

On a the daily chart what I believed was a downward correction within a longer term uptrend is also taking on a more complex structure. All the major support levels have been breached by the move to the downside on Friday…drawing my prior view into question. The long positions which I had were exited at 1.02 today at a loss.

The recent lower low and and prior higher high has also created an expanding range since near the start of April. This is visually depicted by the small green lines near along the right side of the chart. This creates a low probability trading scenarios as the expanding range may continue or we could continue to drop further. From the long-term chart above, even a sizable correction on this time frame would keep the pair within the correction band on the long-term time frame.  While I have been a bull, in the last analysis I did state:

1.0226 is likely the low for this correction, but if penetrated could take the pair towards 1.0025 [1.0050 now] and the long-term trendline.

Therefore that scenario now is in play. The expanding range complicates it a bit, as well as the fact the long-term trend remains up. Therefore, I have no trades now. Being short in the short-term is likely better than being long, but over the long-term I prefer the long and will wait for another opportunity for a long to set-up assuming the long-term uptrend remains in tact. 

AUDUSD Daily Chart

Seasonality: Historically the time around mid May is bearish for the AUDUSD.  Toward the end of the May we usually start to see an uptick again into the end of July.  This is a secondary indicator though. Price action matters much more.

(Download this just published eBook: Forex Seasonal Patterns eBook - The seasonal patterns of the EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CAD and Dollar Index by Cory Mitchell, CMT - Get It Here)

I personally do not trade expanding ranges. Therefore, my personal strategy is do nothing in this instance and wait for the a clear move outside this lateral expanding range–that could be days or weeks away.

AUDUSD Analysis – Trading Environment

The pair is in a corrective phase on the long-term and short-term. Long-term the correction is within an uptrend. Short-term the correction looks be within a downtrend. The conflicting signals and corrective nature on multiple time frames is likely to make trading difficult for swing trading. Therefore, other pairs may present higher probability opportunities.

Daily Average Movement (2-week): 83.8 pips. Keep this in mind if setting daily targets.

Below is the average volatility by day of the week (5 week average):

Average Weekly Volatility: Based on a 10 week ATR the pair is moving about 224 pips per week. Keep this in mind when considering whether your targets are likely to be hit next week.

Noteworthy Correlations to Other Pairs: Strong positive correlation to NZDUSD on an hourly, daily and weekly basis.

AUDUSD Analysis– Trading Strategy at this Time

This was the prior trade which was stopped out today.

Long anywhere near current levels (1.03 area). Ideal is near 1.03 down to 1.0260.

Stops below 1.02. Targets at 1.0515, 1.0585 and then another (or others) will likely be determined at a higher price and at a later date as the up move unfolds (if it unfolds).

No new trade at this time. 

Additional Notes: Being long provides a positive roll. Conflicting signals make this a less attractive pair to trade at the moment. Short-term momentum is down.

Regards,

Cory Mitchell, CMT

This is not a recommendation to buy or sell. Trading forex involves substantial risk of loss. This should not be considered investment advice. Please see our Legal Disclaimer page to be aware of your risks.

Kweku Adoboli: The Rogue Trader Who Needed A Miracle

By Jenny Short

In September 2011 things were not much different from how they are now. Large parts of the world were still trying to reckon with the financial crisis which has brought about huge amounts of unemployment, the death of countless businesses and just general misery amongst the population. Things still don’t look like they’ll be picking up dramatically any time soon and still there is no general consensus on the right way to deal with it. It is a time of confusion for everyone and that usually means people end up doing some extreme things. With supermarkets having to security tag meat due to increased theft, how far do you think people would go? How about risking your employer the grand sum of 2.3 billion dollars just so you didn’t have to feel the bite of the recession? No? Well that’s exactly what Kweku Adoboli did.

Kweku Adoboli was just 11 years old when he moved from Ghana to the UK as the son of a UN worker. He was enrolled at Ackworth School, a Quaker-run private boarding school near Leeds. During his final year at the school he was the Head Boy. He went on to study at the University of Nottingham where he graduated with a degree in computer science and management in 2003. By March 2006 he was a trainee employee with the Swiss bank UBS. Eventually he became a Director of the bank’s Global Synthetic Equities Trading team, a Delta One trading desk (Jerome Kerviel, another rogue trader, was also a member of a Delta One trading desk). Finally, come September 15^th 2011, Adoboli received a visit at his desk from the London Metropolitan Police and was arrested. To this day he is being held without bail with his trial scheduled to take place in September of this year. So how did he manage to cause such a big problem for UBS?

UBS’s explanation is that Adoboli essentially used phantom money from “forward-settling” ETF cash positions. Certain European ETF transactions do not get issued with confirmations until settlement has taken place. This means that a party in a transaction can actually receive money before the whole thing has been confirmed. Of course, this doesn’t mean this money can simply be taken and then used though. The seller, in this case Adoboli, can still put this cash in their books and use it for further transactions. When Adoboli was eventually arrested he had racked up a $2.3 billion loss for his bank. That all being achieved in the space of 5 short years. Although he has not caused the biggest loss in history (this being held by the aforementioned Kerviel who caused a £3.7 billion loss for Societe Generale in 2008) it was enough to cause a huge fallout for UBS.

On the 24^th September 2011 Oswald Gruebel resigned from UBS. He was the bank’s CEO and left “to assume responsibility for the recent unauthorized trading incident”. This obviously led to more confusion and trouble for the company with rumours of massive lay-offs abound (in fact, the amount that was lost was equal to the elimination of 3,500 jobs that UBS was already planning). Eventually the heads of Global Equities at UBS too resigned. They were Francois Gouws and Yassine Bouhara. These resignations are fairly unsurprising considering UBS’s own computer system sent out a warning about Adoboli’s activities and nothing was done. Although UBS didn’t come close to collapse like other institutions in the same situation (a prime example being Nick Leeson who caused Barings Bank to fail, see: How Nick Leeson Brought Down Britain’s Oldest Bank), its reputation has suffered massively from the incident. Come November 2011 UBS decided to cut back half of their investment back risk-weighted assets in order to lower risk exposure.

So come September 2012, Kweku Adoboli will be on trial for around 8 weeks to see what his fate will be. It’s not hard to think that he’ll be wondering why he did what he did in the wake of Kerviel’s rogue trading being discovered which took place only two years after Adoboli started with UBS. He’s probably also racking his brains why he didn’t just become a parcel courier instead of a banker. He definitely got worried shortly before being arrested as he posted a Facebook status simply stating, “I need a miracle.” Although he will surely regret his actions now, it is a near certainty there is another banker out there planning similar actions and convincing himself he won’t be the next Adoboli.

——————–

Where is the Stock Market Headed – S&P 500 (SPY) Scenarios

Cory Mitchell, CMT

The chart below was sent out recently in the free weekend newsletter. It shows three profit target scenarios which could play out over the coming weeks (two scenarios) and possibly months (the other scenario).

The yellow lines on the chart mark what so far is a 4 out of 5 wave Elliot Wave pattern. The white lines mark where the fifth wave is likely to go. Notice the two shorter lines come very close to the same price target provided by the trend channel technique (red parallel lines). One of the white lines extends beyond the red channel, called a throwover.

I remain bullish but we are about to the enter what is very likely to be the final wave of this move higher. The prices dictated by the ends of the white lines are highly likely to be major turning points. If the first mark is exceed we are likely proceed to the next target and if the second is exceed the third is likely to be the next target. This will be addressed at a later date if indeed this market does move higher and we approach those levels.

To summarize the chart and the question of “Where is the stock market headed?”: I believe there is still upside left, but that upside is likely to form what will be a major top at a price near $147, $148.85 or $157 in SPY. Please note those lines are meant to give a visual of the price targets and are not “time targets”. Use that red channel as a guide as the upper band is very likely to mark the top of this advance (all targets are near it). This top will likely be  followed shortly by a very significant decline. Seasonally the market peaks out in mid-May to early June and then enters a lull or decline.

There of course is another scenario, if we drop….

If we drop back below the recent lows ($135.76) we could go down to $134 which would adjust the upside targets slightly. At that time I would address if $134 is likely to be a low for the correction or if we can expect further declines. Basically this scenario will be dealt with if it develops. Currently momentum still seems to be to the upside.

Cheers,

Cory Mitchell, CMT

ETF and Stock Traders….Have you checked this out yet?

One of the coolest features of Bill Poulos’s new intelligent Portfolio Prophet trade alert software is the ability to track a CUSTOM portfolio of Exchange Traded Funds (ETFs)…

This is especially handy if you want to see what the Portfolio Prophet has to “say” about markets the so-called “gurus” are talking about in the news…

• It can kind of act like your own private B.S.-detector…

Check out this quick demo Bill recorded that shows you how he throws 2 ETFs that have made big news headlines into a custom portfolio to see if if there’s REALLY any profit potential there…

Check it out here…

Are the “talking heads” on the big cable financial shows full of it? Or do these ETFs warrant further inspection?

Regards,

Cory Mitchell & Bill Poulos

p.s. After you watch Bill’s new video, join his “CUT IN LINE” list which will get you a one hour jump on the rest of the world when it goes “live” on Monday. Every time I’ve seen him release a major product it sells out faster than expected; and from all the “buzz” surrounding the Portfolio Prophet and the hundreds of comments that flooded his training site, I expect the same thing to happen again. If you’re NOT on Bill’s “Cut In Line” list, I can’t promise you’ll be able to get on board in time before it sells out.

If you have a questions about the analysis see the How to Use the Analysis post. If that does not answer your question, then please leave a question or comment at the end of the analysis.

USDJPY Analysis – April 29, 2012

Cory Mitchell, CMT

Recent Events:  The pair closed at the low of the day on Friday and penetrated the former low at 80.31.

USDJPY Analysis – Long and Medium-Term

The trend remains down for the USDJPY over the long term. We can go back to the high in 2002 to see the massive downtrend the pair has been in. That downtrend is no danger at this point and remains in effect. Moves as high as 1.09 could still be considered corrections in this long-term downtrend.

Going back to 2007 we can see that the pair has broken above a medium-term trendline (green, downward sloping) indicating that we are likely in a large intermediate correction higher.

USDJPY Weekly with Trendlines and ATR.

USDJPY Analysis – Trading Term Outlook

Throughout this correction I have viewed it as a correction and buying opportunity for the move higher which is likely to materialize. The correction is taking longer than expected though and it may still have room to go. Here is an excerpt from the April 10 analysis:

The bullish bias remains intact unless the pair gets back to 79.90. A move toward this level has become much more likely this week as levels which were expected to hold this market up have not, indicating a movement toward this lower support level. This we week are seeing the rate move below 81. This means the correction could extend down into the 80 region.

Since that was written not much has changed.  We are also in  a similar position to where we were back on March 16.

80 to 79.90 remains the support level to watch.

Also from April 10:

80 to 79.90 is also a significant area. If this down leg reaches that mark it means the current leg is 1.68 times length the original down leg (March 15 to March 23). This is by no means a rule, but corrective waves often have some relationship to each other and it does provide a context for where support is.

Therefore, this entire area between 81.25 and 79.90 is a support area. The lower end of this support area is also the 50% retracement of the February to mid-March rally.

The short-term trend is down, and the intermediate trend remains up. There is still room for this pair to continue falling based on the breach of 81.25 (significant because it meant the current and original down leg would have been near equal). Buying in the support area presents a potentially low risk buying opportunity for those looking for this longer-term move higher to continue.

Additionally, the pair has been moving lower within the trend channel shown on the chart. If we see a break below 79.90 that trend channel is likely to provide support near 79.30.

USDJPY Daily with Trendlines and ATR.

USDJPY Analysis – Trading Environment

Seasonality:  Mid-March to early April is generally bullish time for the USDJPY. May is typically a bearish month for the pair.

The pair has not been following the season pattern very closely so far this year, therefore, until the price pattern and seasonal pattern align the seasonal patterns are not significant.

Daily Average Movement (2-week): 57.6 pips. Keep this in mind if setting daily targets.

The chart below shows daily volatility by day of the week (5 week average).

This means that over 24 hours the pair, on average, moves that many pips. When short-term trading, this number is very relevant. For more on how to use correlations and volatility see the articles listed at the top of the Daily Forex Stats page.

Weekly Average Movement: Based a 10 week ATR the pair is moving 178 pips on average a week. This can be used a guide to determine how long it will take for stops or profit targets to be reached.

Noteworthy Correlations to Other Pairs: EURJPY has a strong positive correlation on a daily and hourly basis. No significant correlations on a weekly basis.

Keep these correlations in mind to avoid overexposure to underexposure. Correlated pairs also have potential hedging capabilities.

USDJPY Trading Strategy at this Time (Swing)

There is a current long trade on from prior analyses.

Can go long anywhere between 81.25 and 80.  Stops were originally set at 79.90.

This may still be ok but given the current target a bit more room may potentially be needed (below trend channel support at 79.30).

Adjusting stops is not recommended unless the trade can be kept within the personal risk tolerance per trade. For instance, I am long the USDJPY and I never risk more than 1% of my account on a trade. On this particular trade I have risked less than 1% so I do not mind adjusting my stop a slight bit as long as my overall risk stays within parameters and the overall outlook has not changed (currently I do not believe it has; based on my methods I still am inclined to believe that this is a correction in a longer-term uptrend).

Target remains at 84.85. There is also another target, which should be in the 85.30 to 85.50 area, this target and potential others will indicated at a later date if the price moves towards recent highs. This trade has already taken several weeks (more for some parts of my position) and if it does indeed reverse it will likely be at least a few more weeks till the targets are hit. Stops could be potentially be triggered as soon as next week.

Ideal Hedging Candidates: Nothing ideal, but EUR/JPY and GBP/JPY can be used.

Regards,

Cory Mitchell, CMT

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