Welcome Traders to today’s overview for the upcoming week!
Hope you had a good weekend and plenty of time to do some charting. In my opinion it is never a bad moment to do analysis when the charts are standing still. It gives a good opportunity to create excellent Forex strategy trading plans.
Today’s analysis will focus on the long-term charts, such as the weekly graphs, as Mondays and Fridays are never the best days for intra-day trading.
Mondays are difficult because the markets are trying to find their balance and direction after the weekend pause. Fridays are tougher because the market has already made substantial movements throughout the week.
On Monday’s I therefore like to analyze the long-term charts and identify whether or not there are any interesting swing trade setups. The EURUSD will be our first focus.
The EURUSD has been retracing downwards for the last 3 weeks. This retracement can be explained by the following facts:
1) The currency has completed 3 waves up
2) The currency has completed 3 waves up within the 3rd wave
3) There were 3 waves in each of the 3 waves within the 3rd wave
4) The wave 3 target hit the -0.618 target right to the pip (day chart)
The EURUSD up move was therefore completed and it was high time for a down move.
The Big Question
The big question is: how to trade the EURUSD? Is the EURUSD upward correction over and are we now at the start of a down trend? Or will we make one more upward correction before making a bigger down trend?
Let us take a look at the week and month chart for more guidance on how to trade the EURUSD and formulate a trading plan.
On the month chart we are able to see that the current month of February is still retracing January and has not yet broken its low at around 1.30. Another interesting fact is that the EURUSD had 6 bullish months in a row. A retracement of that move up only seems naturally now. However, there is something else that is even of more importance.
The most important factor in my analysis is that there is still a high likelihood of testing the previous top on the month chart before moving down again. Why?
The last down move on the EURUSD was not able to break the pervious bottom. That created a wedge where price cannot break tops and bottoms. The EURUSD is now in its final leg of a contracting wedge. In theory this wave up can stop anywhere and at any retracement of the last move down.
But I do believe that certain areas are more likely than others.
1) The probability of the currency retesting the previous high is high
2) The probability of the currency testing the upper week/month wedge line is high
3) The probability of the currency testing the 786 Fibonacci retracement level is high
When looking at the week chart, we can see that the move up did not stop at a Fibonacci retracement level of the last swing high swing low to the downside. But we are respecting the Fib targets to the upside.
The upside Fib level targets are so far more important than the downside retracement levels. So in that regard I do believe that the EURUSD monthly wedge would finish its upward correction. That upward correction most likely will end at a Fib level retracement such as the 786 and not half half way the 500 and 618 Fib.
Therefore when putting all the pieces of the puzzle together, I do believe that the likelihood of this down move turning out to be a correction of the up move for another leg up is high.
If we place a Fibonacci retracement key on the last move up, we can see that we are at the 500 Fib, plus trend line support as we speak. Another likely bouncing spot to the upside could be the 500 Fib and huge weekly bottom at 1.2670.
Another way of looking at the chart is fibbing the last wave up on the week chart, in stead of the entire double wave up. In that case we can see the the EURUSD respected the 500 Fib last week. A move down to the 618 and then up to the -618 target which equals the 786 retracement is also a likely scenario:
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And last but not least, have a great week of Trading!
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