Breaking an important top or bottom always provides fireworks and spectacular sights. These decision spots will raise the question: will price manage to sustain its momentum, gains and continue or will price reverse? A variety of scenarios can develop during this time of uncertainty:
- Massive impulsive breakout
- Break, pullback followed by continuation of the breakout
- False breakout and reversal
- False false breakout and continuation
- Price lingers and consolidates
Forex traders are able to gain a winners edge when they correctly anticipate which scenario will unfold. You can use experience, tools and strategies to lift those odds, but be aware that nobody will reach perfection.
In today’s FX market there are at least 2 currency pairs that have a break of a top or bottom: the EURJPY and USDCAD.
EURJPY BEARISH PUSH
The EURJPY recently pushed up higher and broke a resistance trend line (orange) BUT the break turned out to be a false breakout and price reversed strongly (blue circle). Currently, the EURJPY is in the same breakout situation (with a bottom instead). Let’s compare the two.
The first breakout had a big weekly wick on top of the candle, which is a candle stick pattern called “shooting star”. By the end of the week the bulls were clearly not in control. In these scenarios a breakout can easily turn into a false breakout and indeed the bears capitalized on the subsequent reversal.
With the current breakout Forex traders will need to have patience. The weekly candle is a doji (when making the screenshot) BUT the candle is far from closed. When this week’s weekly candle does close, it will provide a great clue as to whether the break of the bottom and support trend line (purple weekly) is:
- False (wick on candle) à longs are preferred BUT be cautious of the resistance lines (orange)
- Strong (close near candle low) à shorts are preferred BUT be cautious of the various layers of support lines (green lines and circles) as the road down could be bumpy
So far the break is not looking that great on the daily chart (decent sized wick on bottom – blue circle):
USDCAD BULLISH PUSH
The US Dollar is having a struggle against the Yen, Aussie and Euro but is gaining versus the British Pound and the Canadian Dollar.
The USDCAD has in fact pushed through the daily top of 1.1270 (from March) and is setting a yearly and decade record (blue circle).
This week’s weekly candle is looking strong so far but I will wait patiently till the end of the week to see whether the bulls remained in control.
On the daily chart price I can see that price is right at the top of the uptrend channel (blue). Price could therefore go sideways for the rest of the week. Assuming that the USDCAD will not encounter a false breakout, I would be interested in longs from the broken top and other support levels.
The bounce zone (green circle) would seem the most logical for a long position and uptrend continuation with a stop loss below the bottom (red line). Main target is 1.15.
Do you agree with the USDCAD trade setup?
What do you think the chances are of a false break on the EJ?
Thanks for sharing this article and happy trading.
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