Thursday, October 04, 2007

Head & Shoulder patterns

Defending parity.

I'm trading the CAD/USD futures from time to time (be aware that they trade invers to the USD/CAD FX market. So being short the futures means you go long USD/CAD FX)

Globetrader_98

Yesterday after the market close I thought:

Chris, the Euro is down a full handle on the day, Oil is down, Gold is down, but USD/CAD is still hanging around parity. Go short the futures overnight, you might get a nice move. Of course I know, that while Asia is active USD/CAD is usually not moving a lot, but you never know. So I took the short at 1.0016 (which equals a long 0.9990 USD/CAD FX)

This morning we are still hanging around parity and I was confronted with the question, whether the trade is still valid and should be kept open or covered for a profit from 1 to 10 ticks. When I opened the trade, I saw resistance at 1.0010 to 1.0015 and this resistance area on the 60min chart is still valid.

Globetrader_94

A possible cup and handle formation right at the neckline. If broken to the upside the target should be the depth of the cup added to the neckline or a full handle.

Let's look at a bigger picture, keeping the timeframe intact:

Globetrader_99

Market Volume tells you exactly where the neckline is (the POC - not surprisingly I might add - is right at parity), but in addition, it seems we have a pattern within a larger pattern.

We have the low made on 9/22, followed by a lower low made on 10/2. Still any oscillator you add to that chart will scream: Divergence, as the price decline is shallower now.

Now we have a higher low made on 10/4. Right at the level the first low (9/22) was made. An inverted Head & Shoulders pattern? Maybe, but actually the lows are coming to fast after one another. To me this higher low made just 2 days after the low on 10/2, is still part of the inverted head and the right shoulder hasn't yet begun to form. For a nice inverted H&S pattern, we should see price go up to 1.0100, then retreat again to parity around 10/15 and then go up to the 1.0560 area, to test the daily POC, which also would confirm the exhaustion spike on the daily chart.

Globetrader_01

Let's have a look at some other H&S patterns currently seen in the market

The Euro

Globetrader_95

This was the chart, which gave me the idea to look at USD/CAD, as Euro/USD broke a neckline, when it traded below the POC.

But USD/CAD moves quite independant to USD/CAD you might tell me. That's correct. But when the USD is moving up in value, even USD/CAD will heed it eventually. Especially when you look at Oil and Gold and see similiar H&S patterns:

Oil:

Globetrader_96

Gold:

Globetrader_97 

Gold has broken the neckline of the 60min H&S pattern at 734 and the retracement should bring it down to the 710 area, before the uptrend resumes.

Oil is still hanging above the neckline and only a decisive break below 79 will confirm the H&S pattern with a target in the 75 area.

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