Talking Points:
-7 of 12 pairs reflect an extreme SSI reading
-4 of 12 currencies showing a strong ADX trend
- NZDUSD sells off with 79% of traders already positioned long
The Plus Breakout2 strategy is one of the more widely followed by traders. This piece aims to identify those markets where breakout conditions are prevalent, and therefore a follow through of the breakout is more likely.
There are pockets of strong directional movements as only 4 of 12 pairs show strong ADX readings on the 4 hour chart. With the FOMC news this week and the Grexit news, be cautious on increasing volatility.
On the sentiment front, 7 of the 12 pairs are showing extreme SSI readings. An extreme SSI reading is when the pair sports a reading of greater than +2 or less than -2. Extreme sentiment against strong trends provides fuel for those trends to continue and favors a breakout strategy.
As a result, we wish to highlight the NZDUSD. With an SSI reading of +3.8, 79% of the traders are already positioned to the long side of the trade. Since the pair is testing 4 year lows, further losses in the exchange rate may cause these traders to close out or flip to the short side.
Against the back drop of Elliott Wave Analysis, it appears we may be continuing lower in a 5th wave. So the wave count suggests there is further room to drop.
( C lick on the chart to zoom in; after zooming in, press the play button towards the right to set the market in motion)
Created using TradingView Charts
Plus Breakout2 Conviction Chart for June 14, 2015
| ADX | ROC | Volatility Expansion? | Sentiment Signal | Conviction | |
|---|---|---|---|---|---|
| EURUSD | Trend | Bullish | Yes | Bullish | 3 |
| AUDUSD | Range | Bearish | Yes | Bearish | 2 |
| GBPUSD | Range | Bullish | No | Neutral | 1 |
| NZDUSD | Trend | Bearish | Yes | Bearish | 3 |
| USDCHF | Range | Bullish | Yes | Bearish | 1 |
| USDCAD | Range | Bullish | No | Bullish | 2 |
| USDJPY | Trend | Bullish | Yes | Bearish | 2 |
| EURJPY | Range | Bullish | Yes | Bullish | 1 |
| GBPJPY | Trend | Bullish | No | Bearish | 1 |
| CHFJPY | Range | Bullish | Yes | Bullish | 1 |
| AUDJPY | Range | Neutral | Yes | Bearish | 2 |
| EURAUD | Range | Bullish | Yes | Bullish | 3 |
Bold and italicized ratings illustrate those pairs whose conviction ratings changed from the previous report .
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Other charts with ‘3’ conviction ratings include the EURUSD and EURAUD.
Though it appears the EURUSD may have some unfinished business to take care of down towards 1.09-1.10, a dip to those levels will begin to set up long opportunities as the medium term trend appears to the upside .
Likewise, the EURAUD is showing a ‘3’ conviction rating as we appear in the middle of a wave 3 of 3 . Wave 3’s tend to be the longest and strongest so there is likely continued movements higher so long as prices hold above the purple wave ‘i’ high of 1.4350.
Last Week’s Conviction Chart – EURUSD Sentiment Still Extreme at -2
---Written by Jeremy Wagner, Head Trading Instructor, Education
Email me at [email protected] if you have problems copying/zooming in on the price chart above. Feel free to comment on the chart with your views.
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See Jeremy’s recent articles at his Forex Educators Bio Page.
As you can see in the chart above, the ADX and Rate of Change (ROC) are grouped together. Since the ADX doesn’t indicate direction, only strength of move, we want to couple it with a rate of change indicator.
When trading a breakout strategy, ideally we would like to see prices in a trend and moving. This would increase the chance of a breakout that would follow through. If prices are in a range and if the ROC is neutral, that indicates prices are comfortable near the current levels until a catalyst creates discomfort for the price.
Ideally, we would like to see a directional move take place with expanding volatility. Expanding volatility can be measured through analysis of ATR range or perhaps volume expansion.
The fourth item is sentiment as read through SSI. The result of the “Bearish” means the SSI reading is > 1.22 and “Bullish” means SSI is <-1.22. For a current reading of SSI, log into Plus and view the Speculative Sentiment Index section (SSI).
When taking this together and a conviction reading is assigned. It is important to understand the conviction reading is the opinion of the author and not a recommendation to trade, use, or not use the Plus Breakout2 strategy.
A conviction rating of ‘3’ means the ingredients exist for a breakout market condition that the Breakout2 strategy enjoys. A reading of ‘1’ represents a mixed bag and that the Breakout2 strategy is more at risk of a market condition that doesn’t cater as well to breakouts.