Talking Points:
-8 of 12 pairs reflect an extreme SSI reading
-4 pairs upgraded, 2 pairs downgraded
- EURUSD enters support zone with SSI at -2
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.
Directional movements have picked up and sentiment has grown more extreme over the past week. Eight of the 12 pairs monitored are showing extreme readings (> +2 or < -2). Extreme sentiment against strong trends provides fuel for those trends to continue and favors a breakout strategy.
As a result, four of the currency pairs were upgraded this week. EURUSD, USDJPY , AUDJPY , and EURAUD show improved market conditions. On the flip side, two pairs were downgraded ( GBPUSD and USDCHF ).
Plus Breakout2 Conviction Chart for June 5, 2015
| ADX | ROC | Volatility Expansion? | Sentiment Signal | Conviction | |
|---|---|---|---|---|---|
| EURUSD | Trend | Bullish | Yes | Bullish | 3 |
| AUDUSD | Trend | Bearish | Yes | Bearish | 2 |
| GBPUSD | Range | Neutral | No | Bearish | 1 |
| NZDUSD | Range | Bearish | Yes | Bearish | 3 |
| USDCHF | Range | Neutral | Yes | Bearish | 1 |
| USDCAD | Trend | Bullish | Yes | Bullish | 2 |
| USDJPY | Trend | Bullish | Yes | Neutral | 2 |
| EURJPY | Trend | Bullish | Yes | Bullish | 1 |
| GBPJPY | Range | Bullish | No | Bearish | 1 |
| CHFJPY | Trend | Bullish | No | Bullish | 1 |
| AUDJPY | Trend | Bullish | No | Bearish | 2 |
| EURAUD | Trend | Bullish | No | Bullish | 3 |
Bold and italicized ratings illustrate those pairs whose conviction ratings changed from the previous report .
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You’ll notice from the conviction chart above, the EURUSD was upgraded to a conviction rating of ‘3’. This morning’s sell off for the pair broke below the 2-4 channel and suggests we are correcting the previous up move.
Today’s sell off pushed deep enough into the anticipated support zone to suggest prices have the potential to pivot higher.
SSI continues at an extreme -2 reading as the medium term trend is to the upside . If prices do find support and pivot higher, these sellers become a future supply of buyers as they’ll likely need to cover their trades, resulting in the upgraded conviction rating.
(Click on the chart above to zoom in, play forward the price action. You can also copy the charts to your desktop with a free login to TradingView.com)
Additionally, the EURAUD was upgraded to a ‘3’ rating today. SSI has reached an extreme -5 which is a strong bullish signal. The patterns on the medium term chart suggest we may be in the middle stages of a wave 3 of 3. These tend to be the strongest and longest of the wave sequence.
With an extreme SSI measure, improved volatility, strong trend and pattern pointing in the same direction, the conditions are ripe for a follow through on the breakout higher.
The wave pattern holds so long as we are above the purple ‘i’ high of 1.4350.
Last Week’s Conviction Chart – NZDUSD SSI Signals Short Breakout
---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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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.