If there is one spy skill we all envy, it’s that of Sherlock Holmes, the ability to quickly read a situation and come up with a theory that explains it. Observing patterns and form reading are incredibly valuable tools when it comes to trading. They give you the ability to notice subtle cues and act tactfully in order to take advantage of the move. In this month’s article, I am going to use my spy skills to unlock the patterns that the EURUSD made during its bear move in 2016.
If you refer to the chart below, the first section of the bear run gave us the first bit of evidence. The move started from 3 May 2016 – being two days before the May Seasonal Date for 2016 and ran into 30 May 2016 doing a run of 518 pips in 27 calendar days or 19 trading days.
Chart One – Euro Daily Bar Chart
By using your time extension tool, similar to the way we chart time frames on our hand-drawn charts, you would have been watching 38 days from the May top, which was two multiples of 19. This gives us a target of 24 June 2016 – (this was the date of Brexit).
What was interesting was the market closed on 23 June 2016 at 1.1385. One would be of the assumption that there was no way the market was going to get to 1.0914 in one day, especially when the market is pointing up. However, as history goes to show, the market did get to 1.0914 on 24 June 2016 to complete a 100% repeat of the first section down of 518 pips. The market moved 523 pips, all of which happened on the same day.
Given that it had repeated a similar price cycle of 523 pips – time now had to catch up.
By projecting 19 days from 24 June 2016 (outside day) the market gave us 21 July 2016 as a new potential turning point. The market bottomed on 22 July 2016 – which was 1 day out.
As a tactical spy, you should make sure you take a note of this ‘1 day out’ as it may provide evidence in the future.
Chart Two – Euro Daily Bar Chart
Projecting 19 days forward again from the low on 22 July 2016, the next place our evidence points to is 17 August 2016. This may be a potential turning point and therefore should be investigated.
If you refer to Chart Three, interestingly enough the pullback or reaction of section two produced three bursts as opposed to section one which only produced two bursts. Simple patterns like this are worth noting as it may be very useful in the future.
If we break this little pullback down, each of these three sections was similar in pitch, where price is divided by time. Try the calculations for yourself. Once again, as you will note in Chart Three the top was produced on 18 August. This was 1 day out – again. Our spy evidence is starting to pay off as history is repeating in multiple ways.
Chart Three – Euro Daily Chart
If you refer to Chart Four, by projecting 19 days from the 18 August top, the date you’d be watching is 13 September 2016. The market started moving sideways from 31 August (black square), which ruined the 13 September date. If however, we take two 19 day cycles (38 days) and project it from 18 August 2016 we get the date of 10 October 2016 – on which the market broke out and the bear trend resumed.
As many of you spies know, the FRO is always worth studying. By taking the FRO of 523 pips – and projecting this from the 18 August top – the target price level sat at 1.0847. As you can see from Chart Four, the market lowed at 1.0848.
I had the privilege of presenting this trade at our very first Active Trader Q&A Webinar. I showed you where one particular student took advantage of this setup and went on to double his account.
Chart Four – Euro Daily Chart
Projecting 19 days from the 10 October 2016 breakout level, gave us 4 November 2016. The US Election was on 9 November, which sat in line with a 6 months seasonal date from the initial top on 3 May 2016.
While the market made a top on 4 November, the US election blew the top off this and ultimately made its top on 9 November 2016. The total pullback in section two was 456 points. If you projected the price in this pullback (pink line) from 25 October 2016 it gave 1.1304 as the target – the market topped at 1.1299 (5 pips off).
Chart Five – Euro Daily Chart
So, by now, you can start to see the power of watching sections of the market. The tactical spy skills are starting to pay off. We have seen the market produce three relatively equal sections in price (blue arrows). If you have a look at section four, projecting 19 days from the 4 November 2016 top (which was the original top, not the US Election Top), it forecasts a low on 1 December 2016.
It is also very important to take the physical top as well. As the market topped on 9 November 2016 from the election – 19 days projected from 9 November gave 6 December as the low – in which the market bottomed on 5 December (1 day out, again).
The price was also in line with the initial 518 pips in May – however this time it did 796 points, which is 150%.
Chart Six – Euro Daily Chart
Due to the large size of section four, this was not the end of the move, but because the markets often move in three or four sections, by taking the first three sections as a range which is 766 pips and projecting it from the end of section three’s pullback, the target level was 1.0533, which was in line with the 796 pip move of the first range out. So, while we have harmony in the fourth section, this looks to be the first section of the bigger picture second section (green lines).
Chart Seven – Euro Daily Chart
Projecting 19 days from the initial 1 December 2016 date we get 28 December 2016. The final higher bottom was produced on 28 December and pushed very hard to the upside. By projecting 19 days from 6 December 2016 (the new 19 day moon cycle) the top comes in on 30 December 2016.
From a form reading perspective, this is an obvious signal reversal bar. It is also very easy to note that the 16 March 2015 low at 1.0456 was broken. At times like this, I see the pattern as being a new potential double bottom set up.
Chart Eight – Euro Daily Chart
Now, given the market has topped on 30 December 2016, by projecting 19 days forward we get 26 January 2017 as one date and if we continue the 19-day cycle from the top on 3 May 2016 we get 24 January 2017.
Also, other spy evidence showed that from a fundamental event perspective, Inauguration Day 2017, the day Donald Trump took the role of chief executive of the United States, was Friday, 20 January, 2017. It was the nation’s 45th President who would be sworn in on the steps of the U.S. Capitol at noon when the term of President Barack Obama expires.
Now regardless of what time does, we have two potential price setups that can take place. Scenario One would be that the trend continues trending down and break the March 2015 lows. Scenario Two is that a bottom will be established and a Double Bottom set up can be trended long.
In the event Scenario One played out by projecting the first range of 518 pips from the 30 December top we get a price target of 1.0133 (blue line) and if we use the bigger picture sections (green lines) and project this from the 8 December top, we get 1.0106 as a price target. We can take the average of these dates and prices and make a forecast that the target will be 1.0200 on 25 January 2017.
Chart Nine – Euro Daily Chart
In the event of Scenario Two playing out, you’d be watching to see how often the market was able to close below the March 2015 low level at 1.0456. If you look on the weekly chart the market was able to close below the low on its break. It also pushed lower the following week but failed to close lower. This was followed by two additional weeks where the market failed to close below the level.
Essentially, with important tops and bottoms like this, given the market failed to have a clean short break, the market knew it was a false break. Often when everyone knows that it was false they do the opposite and the market moves away.
As a final note, we can all be a spy like Sherlock Holmes. It is a matter of paying attention to the subtle clues the market presents and using those clues to tactfully provide from the moves. I suggest you try it for yourself. Have a go at pulling apart the 2017 bull market run on EURUSD. Try the clues we pulled from the 2016 bear run and apply these time and price patterns.
It’s Your Perception