Market Commentary 02/02/16

EUR/USD Further Downside ?

EUR/USD continued advancing higher today, breaching a supply zone created by the RBA announcement last week.

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We did see a sharp down move around 4:00 this afternoon which managed to break the low put in place yesterday.

This is the first sign we have had of the market wanting to move lower. The source of the down-move (marked by a line on the image) is the most probable place for the market to turn back to the downside.

Tomorrow or tonight ( because the market is basically at the source of the down move already ) you will need to watch for price action signals to go short above the source. Ideally you want to see a large bearish engulfing candle on anything above the 15 minute chart, be careful taking signals off the 1 or 5 minute charts as they usually do not tend to work so well.

If the market breaks the high of the down-move, assume the up-trend is still intact and begin looking for opportunities to go long.

 

AUD/USD – Moves Lower From Supply

Yesterday I anticipated the bullish pin we saw on the daily chart would fail to push the market higher as the move up creating the pin did not seem very strong. Also, I pointed out that the supply zone seen on the 1 hour chart might be a good place for a short trade as it was the last point where sellers came into the market and pushed the price down.

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Last night we saw the RBA interest rate announcement come out and, as expected, they decided to keep the rate at 2.00%.

While the rates remained the same, the announcement did still manage to create a bit of volatility in the AUD crosses.

When the announcement was released, initially the markets shot up, hitting the supply zone in the process, it then proceeded to move lower over the course of today.

There were two ways you could have traded the zone:

The best way would have been a pending order placed at the zone. Whilst I usually advise against this, in situations where economic news gets released, they are typically the best way to trade supply and demand zones.

You see, when news comes out, commonly you’ll see the market move really quickly in one direction only to suddenly turn and move back in the other direction, when they come out like this it can be very difficult to get a good entry using price action signals within the zone.

This is due to the length of time the market actually stays in the zone.

Most big news releases happen in a flash, they move one way then they move the other, usually the market direction has been determined within 5 or 10 minutes after the release. The speed at which this takes place means there’s very little opportunity for price action signals to develop inside the zone.

By the time the market direction has been decided the price has already moved far away from the zone, decreasing the risk reward potential of the trade significantly.

If you didn’t have a pending order placed at the zone and were comfortable with the decrease in the amount of money you could possibly make on the trade, then it was possible to still take a price action entry after the market had run into the supply zone.

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Here we have a 15 minute chart of the RBA announcement.

When the market hits the zone, the move lower produces a bearish pin bar. Some traders will take this pin as their signal to enter a short trade, usually this is not such a good idea.

The better entry, in terms of confirmation, is the bearish engulfing seen immediately after. When the market drops, creating the bearish engulfing, it confirms the market is going to go down. As perfect as the bearish pin bar looks, many times you will see pin bars created by news events end up being duds, by that I mean you’ll see the pin bar then, a few candles later, you’ll see the market begin to advance back in the direction of the pin bar wick.

This is due to professional traders taking profits.

The perfect time for bank traders to take some profits off their trades is when lots and lots of retail traders are placing trades. One of the most active times in the market is when economic news gets released, one look at the volume tool on MT4 reveals how many traders are placing trades during the news release.

If the pro traders take profits, it will result in the news candle leaving a large wick. Many traders mistake this for a good pin bar setup, they see the large wick assume it to be a big rejection taking place and then sell expecting the market to move lower. ( or higher if it was a buy setup )

When it fails to move lower and instead begins moving higher, the traders can’t understand why a seemingly good looking trade hasn’t worked out like they anticipated ?

If you wait for an engulfing candle to appear after seeing a large pin bar during a news release, then you will not have to guess whether the pin bar was created by profit taking or by actual buying/selling, as the engulfing candle confirms the wick was made due to pro traders placing trades with the expectation of making a profit rather than taking profits off their existing trades.

Tomorrow, expect further downside. A potential short entry could be from the weak supply zone marked on the image, if you decide to trade this supply zone make sure you wait for a significant engulfing candle, as this zone is not the strongest one ever seen and it has appeared after the market has already moved down quite a large distance, which always decreases the odds of a successful trade.

 

USD/JPY – Ready For A Bounce ?

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USD/JPY continued to fall today after striking the support level we marked out yesterday.When it did arrive at the support level, a small up move was generated. Unfortunately this was not enough to break the lower high made yesterday.

The reason the market is moving down right now after such a large swing up, is to make all the traders who brought late into the up-move lose money. Big moves like this cause reactive traders to place trades – the bigger the move, the more traders who would have brought.

Professional traders know these reactive traders go long when the market moves a big distance in a short space of time, so they use this as an opportunity to begin taking profits off their existing positions. It eventually gets to the point where the take profit orders become bigger than the buy orders coming into the market from the reactive traders, as result of this the market starts to fall. As the market declines it makes the reactive traders who were long start closing their trades at a loss or a small profit, this puts sell orders into the market which the bank traders use to place additional buy trades.

Going into tomorrow I’ll be watching the second support level marked on the chart. We are still waiting for a higher high to be made. For now keep an eye out for price stalling at support level marked on the image, keep in mind we also have the Bank Of Japan speaking later tonight, this could be the catalyst for another move up past the high of this entire downmove at 121.679, I would refrain from placing any more trades until the speech has been made.

 

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