Talking Points:
- EURUSD Most Extreme Bearish Sentiment since May 2014
-9 Pairs Switch from Range to Trend
-8 of 12 Pairs Display Strong or Increasing Volatility
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.
Two weeks ago, we noted how SSI switched to a uniform bear signal for the US Dollar . This past week saw incredible follow through on that signal as the Buck lost significant ground for the week.
With the EURUSD moving higher about 400 pips since our previous article, retail traders were net sellers on the way up. Now, with EURUSD SSI standing at -2.84, that is the most bearish sentiment reading since May 2014.
Sure, those traders who were short the EURUSD on May 8, 2014 proved correct as it kicked off this huge sell off. However, look at the previous 4 weeks PRIOR to May 8. From about April 9 to May 7, SSI was showing a reading between -2.8 to -5.4 and traders were wrong leading up to that top. This helps illustrate the power behind reading sentiment.
EURUSD 2 Hour Chart
( Created using FXCM’s Marketscope charts)
When assessing the EURUSD price chart above, there appears to still be some unfinished business to the upside. We are looking for 5 purple waves to complete higher with wave relationships showing up near 1.14.
Although a breather and dip lower is due, this should only be a partial retracement to near 1.10 or 1.11.
So with EURUSD sentiment hitting extreme levels not seen in a year, it is something to note especially when those traders are running against the immediate trend higher.
As a result, the EURUSD conviction rating for the Breakout2 strategy was moved to the highest rating of ‘3’. Many of the ingredients exist for a follow through of a breakout higher.
Plus Breakout2 Conviction Chart for May 1, 2015
| ADX | ROC | Volatility Expansion? | Sentiment Signal | Conviction | |
|---|---|---|---|---|---|
| EURUSD | Trend | Bullish | Yes | Bullish | 3 |
| AUDUSD | Trend | Bullish | Yes | Neutral | 1 |
| GBPUSD | Trend | Bullish | Yes | Neutral | 2 |
| NZDUSD | Trend | Neutral | Yes | Bearish | 1 |
| USDCHF | Trend | Bearish | Yes | Bearish | 2 |
| USDCAD | Trend | Bearish | No | Bearish | 2 |
| USDJPY | Trend | Neutral | No | Bearish | 1 |
| EURJPY | Trend | Bullish | No | Bullish | 2 |
| GBPJPY | Trend | Bullish | No | Bearish | 1 |
| CHFJPY | Trend | Bullish | Yes | Neutral | 1 |
| AUDJPY | Range | Bullish | Yes | Bearish | 1 |
| EURAUD | Trend | Bullish | Yes | Bullish | 2 |
Assessing the other pairs for the Breakout2 strategy, nine of the pairs switched from range to trend. This is on the heels of the previous week switching from trend to range. Volatility picked up this week as well. These Jekyll and Hyde moves does make analysis a bit more difficult with market conditions making frequent changes.
Broadly speaking, the rise the EUR has renewed interest in the retail traders to sell anything EUR. As a result, pairs such as the EURJPY and EURAUD were upgraded to a ‘2’ conviction rating this week.
Bold and italicized ratings illustrate those pairs whose conviction ratings changed from the previous report .
Last Week’s Conviction Chart – Trend Strength Broadly Weakens for US Dollar
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 FXCM’s 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 ( sign up for a free trial if you don’t have a live FXCM account) 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.
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---Written by Jeremy Wagner, Head Trading Instructor, Education
The Plus Breakout2 strategy can be automated. If you wish for the trades to trigger automatically into your account, register for a Mirror account which provides you access to dozens of other strategies as well.
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