Technical analysis

AtlasCapital Financial Services Ltd’s ATLAS eForex service, presents this Technical Analysis report on the currency pairs: EUR/USD, GBP/USD, USD/CHF and USD/JPY.

In this report we will try to identify price levels which can reverse the downward or upward direction of prices during short, medium and longer periods of time.

Ladies and Gentleman let us be clear. No human being “can read” the future.

Nevertheless, we keep trying. The technical analysis method is used in many fields and particularly it is used most in the financial markets.

The target is always the same, to predict the “future”; this is, since anyone can remember, a human need almost for everything.

In financial markets, the aim is to predict the evolution of a value’s price. 

In technical analysis we use Charts; charts are images “showing” the development of the price over time and as we all know, an image is “worth a million words”.

Apart from charts, we use various “tools” which help us to identify and measure the future behavior of the market and prices as they develop over time. 

We will use three types of charts i.e. a 5 minute chart, an one hour chart and one day chart. The “5 min chart” will be used to forecast short time price changes, the “one hour chart” to forecast medium time price changes and the “one day chart” to forecast price changes for  a longer time period.

To start, we will use simple tools for the identification and measurements of price moves.  Among others, we will use tools, like Trend Lines, Trend channels, Fibonacci scales, Reversal levels and Simple Moving Averages (SMA) of 50 and 200 periods.  As time goes by, we will increase the number of tools. Obviously, each one will be clearly explained before it’s applied on a chart.

This technical analysis does not take into consideration any “fundamental” values of the financial instruments under examination; in addition, it does not, repeat does not, take into consideration any of the “news” regularly provided from various institutional sources or from large private enterprises.

This technical analysis is based entirely on “charting”, therefore it will include many “what…If” and corresponding “if…..not” scenarios.  It will also include, many, “or” and “else” scenarios. 

Example:  A statement like, “if the price of EURUSD will not drop below a given reversal level (support), it is then expected to rise up to the next reversal level (resistance)”; must also include the “if….not” condition; in other words, what will happen in case the price of EUR/USD drops below the support level?”

Ladies and Gentleman let us be clear again.

A hundred per cent successful technical analysis does not automatically produce successful trades.

The technical analysis looks like a “road map”. It shows us the way to reach a destination; it may even tell us what to expect during a trip there. It does not tell us, though, how or when to make the trip to reach our destination on time.

The trade is like the trip.  Its beginning, intermediate stops, total duration and arrival time varies according to how well we can drive, the selected destination, our endurance during the trip, our optimism or pessimism, our decisions during the trip, our determination to reach our destination, etc.; in other words, the trade, alias the trip, depends on us.

People create markets. The human actions or reactions, influencing the markets, depend on the characteristics of group(s) of people, their motivations, their interests and other factors. Therefore, markets need time before they move.  People’s uncertainty causes markets to side step, while people’s certainty causes markets to move rapidly on either direction. Timing, therefore, is the element that complements the technical analysis. Timing is the moment to open a position, timing is for how long you should keep a position open, timing is the moment you should close a position.  

Unless you are an experienced trader, do not open any trades before you observe the market for some time.

Do not “dive” into the market as you may “dive” into the deep sea, in summer time, to cool off during a hot day.  Diving into the market is dangerous.

Before “diving”, you must first understand what the market is doing.  Charts, as images, give us some of the requested information. The technical analysis helps us to identify the present position of the market with respect to the next reversal price level. There is continuity in the development of the market. Follow the development of the market for some time; verify whether its movement complies with the forecast of the technical analysis.

The technical analysis is seldom wrong. After all, as mentioned earlier, a complete technical analysis includes “what…if” and the respective “if….not”; the market moves either, up, down or sideways. By using, “what…if”, “if…not”, “or” and “else” scenarios, a technical analysis will “always guess” the possible moves of the market.  

The interesting part of the technical analysis is to forecast the reversal levels.

The technical analysis is only a piece of the puzzle called “trading”.  Trading,  profitably, the price levels forecasted by the technical analysis is a completely different story; it has nothing to do with the technical analysis.  Actually, trading is coming later, sometimes much later.

Dow Jones, Monthly Chart

Dow Jones, Weekly Chart

Dow Jones, Daily Chart

The above three charts refer to Dow Jones 30 Index, on monthly, weekly and daily periods. The use of trend lines becomes obvious.

To draw a trend line, we need just two points, two highs or two lows. Often, the importance of a Trend Line depends on the number of times the price “respects” it. For as long as the evolution of price does not “break” the Trend Line, we expect that price will continue to evolve accordingly. Markets have strong memory. Many times, strong trend lines become points of reference, even many years later.

Example: the blue trend line shown in the Dow Jones, Monthly Chart was drawn sometime during the year 1990 after the two lower points (one in 1987 and one in early 1990) were evident.  Prices remained above this Trend Line and around the year 1994-1995 increased their ascent up to the year 1999. The correction that followed (year 2000 till year 2003) did not compress the prices all the way down to the Blue Trend Line; but, the latest correction (financial crisis 2007)), seventeen years later, did compress the prices up to the blue trend line; confirming the strong memory of the markets. Please note that Prices continue to stay above this long lasting blue line.  

Unlikely, when the price breaks the Trend Line we expect prices to change direction.

Markets, often, do not break a trend line in a clear, unequivocal manner. Actually, they oscillate for some time close to the trend line before deciding what to do; i.e. either react, by correcting their recent path, or continue it.

Example: Observe the evolution of Dow price between January and May 2008. The blue relative trend line was broken, respected, re broken and again respected before the market decided to move rapidly downwards.

Anyway, when the price touches a trend line there is an opportunity for trading. It is considered either, the possible “end” of a recent move, or, its continuation to a more distant, more profitable target. Depending on the direction of the price, traders open either, a long position with a stop loss order a little lower than the long price, or, a short position with a stop loss a little higher than the short price.   

The Trend Channels

EURUSD, Monthly Chart

EURUSD, Weekly Chart

EURUSD, Daily Chart

Channels evolve from the Trend Lines; basically, we design a Trend Line and its parallel thus creating a kind of path, a channel, which will “delimit” the evolution of the price in time. In other words, channels may also delimit time periods.

Example: The Monthly Chart of EURUSD shown above includes a “red” channel, still valid, delimiting a long period starting around the year 1985. The weekly chart of EURUSD includes a “blue” channel, which was “broken” lately. This “blue” channel started on March 2009 and lasted until the end of November 2009. The daily chart of EURUSD also includes a “blue” channel which started by the end of November 2009 and is still valid. Indeed, this blue channel was designed after the cancelation of the blue channel designed in the Weekly chart of EURUSD.

Investors should trade the upper and lower lines of a channel; the same way as a Trend Line. The opposite Trend Line “describes the target area. The upward or downward “break” of a channel inevitably leads to a new one. Every channel needs time to develop and many times, in its early stages, is not as apparent as the ones shown above in EURUSD charts.

The Fibonacci scale

EURUSD, Daily Chart, No 1

EURUSD, Daily Chart, No 2

EURUSD, Daily Chart, No 3

We will not elaborate on Mr. Leonardo da Pisa, alias Fibonacci (1170-1250), an Italian mathematician, considered by some "the most talented mathematician of the Middle Ages. In our days, his arithmetic sequence and its practical derivatives are widely employed in measuring the evolution of values throughout our known world, with surprising accuracy. Google, the word Fibonacci and enjoy!

The above three daily charts on EURUSD are identical. On the Chart No 1 and No 2 we demonstrate the application of the Fibonacci Scale on the latest upward move of EURUSD. You can observe the oscillation of the price between the indicated Fibonacci levels. The chart No 3 includes a Fibonacci Scale forecasting the oscillation of EURUSD price after the beginning of the latest correction and the probable exhaustion level of the prevailing corrective move. The prices include on all above charts are live, December 18, 2009 at about 16:30 Hrs.

As previously stated: “….technical analysis and actual trading are two different issues”, therefore, although we feel pretty confident about the accuracy of the above indicated levels, we cannot neither suggest to, nor induce any one, to trade or how to trade those levels.

The Make or Break levels (MOB)

The MOB (Make or Break) level takes into consideration, the momentum, acceleration and other ratio models to define a price projection zone. This price projection should provide major resistance or support for the current rally. Approximately 70% of the time, prices will trade to the MOB projection level and reverse. The rest of the time the prices will reach the MOB price projection and continue to trade through with stronger momentum. Hence the name Make or Break.

In most cases where the market makes or goes through the MOB zone, additional analytic tools will help to identify such breakouts prior to it happening. The price projection zone is determined based on the momentum of the current swing and the previous two swings; therefore, when prices reached the MOB projection zone, they may hung around for a while before breaking through with increasing momentum.