Scanning a lot of charts over the past few days, I am left with the impression that the risk: reward balance for swing traders appears to favour a “long risk” stance leading into the Euro Leaders’ Summit.
Markets have priced for the probability that nothing from the summit is likely to meaningfully change the balance of risk for Europe. Programs to boost growth via project spending have their place but do nothing to address the looming funding problem posed by Spanish bond yields at around 7%.
Having priced for a bad outcome, a lot of charts look as though they could have quite a large response to any good news that may come along in the next few days (whether from Europe or elsewhere).
The basing action of the past few days also provides a good opportunity to place a stop loss just behind recent lows (or peaks) for a good risk: reward outcome if the next news event does happen to be good rather than bad.
USD: Yen looks a good example of this with a possible ABC correction about to be completed on the daily chart.
Big Picture Trend and Momentum
The weekly chart below shows the recent uptrend halting at the 20 period moving average (middle Bollinger Band). This indicates that while price holds below the moving average, the longer term trend remains down; favouring sell positions based on setups in shorter time frame charts.
The fast stochastic has popped out of the oversold zone but could be rolling over again. It would not take much of a move down in price to push the black %K indicator back under its moving average (red %D line).
So a small move down from here would leave both the trend and the momentum heading back down on the longer time frame chart
Daily Chart Setup
On the more detailed daily chart, the recent rally has a potential ABC or 3 swing structure.
The peak at C is at a Fibonacci cluster level. This cluster projects that the B to C swing will be:
- The same size (100%) as the X/A swing and
- 161.8% times the length of the correction from “A” down to “B”
This is a sell set up looking for the major downtrend to resume and take us down below “X”
One approach to strategy with this set up is to wait for the peak at “C” to be confirmed by a close below the candle making the peak. This has not yet happened
The setup assumes that we will move under “X” if “C” does turn out to be end of a 3 swing correction. However half the position is closed midway between X and B to book some profit if a trend gets under way but doesn’t go on with it.
The initial stop is hard behind C. A trend following strategy like this would usually allow for the stop to be moved over time if a major downtrend does develop.