Beautiful Wedge

Last week I traded a beautiful wedge on AUDEUR.

What I look for in an ideal wedge is a structure whereby price action makes 5 touches to the wedge.  This was a perfect example.  A descending wedge is a bullish pattern.  The beauty of this pattern is that it anticipates a target price at a specific time.  The target is determined by creating a line between points 1 and 4, and extending it until it coincides in time with the apex A of the wedge.

In this example, price is currently at 0.6683, on Tuesday 6th July; the target price is 0.6900 late Thursday/early Friday.

My entry into the trade was based on a breakout on a 15M chart:

The bars forming the breakout look abit spiky, but I wasn't looking for perfection here - this was an entry on a 15M chart, but based on a pattern on a 4H chart.  My stop was set below the low of the wedge pattern, allowing for me to run this as a swing trade.

Here is the outcome:

Double-Dip Recession ?

From the perspective of technical analysis, original predictions of a double-dip recession were based on the bullish price action starting in March 2009 being interpreted as a corrective pattern within the longer term down-trend.  The double-dip would have occurred if we saw a characteristic 3-wave retracement completing around 5,200.  What we actually saw was a 5-wave move pushing higher.  Whilst this could be a complex retracement pattern I think it is more likely to be a 5-wave impulse wave indicating the end of the bearish price move that started in 2007.

Based on recent price action, it looks like a head-and-shoulders reversal pattern has formed with the end of wave-4 marking the "left shoulder" and wave-5 marking the "head" of the pattern.

The first potential outcome is that this pattern will fail, indicating a temporary over-reaction to a "China crisis" with prices rallying to previous highs.

The second potential outcome is that the value of the FTSE will drop to about 4260, the level predicted by the pattern.  This drop would be consistent with a 3-wave correction to what is overall a bullish pattern - we'd then expect to see price recover the the highs that we have seen in recent weeks.

A bounce in price at 4200 does not mean we out out of the woods.  A more complex pattern would be that the move to 4200 would be the first-leg of a deeper 3-wave correction, taking us to prior lows - a double dip.  This outlook would treat the double-dip as the completion of a bullish harmonic pattern and represent some terrific opportunities for buying blue-chip stock.

Year End

I haven't placed any posts for a while so I thought I would wrap up the year with a very successful trade on CHFJPY. The trade was a breakout setup placed on the evening of 14 December:

I am using a revised setup for breakout trades which in essence is a double-bluff on a false breakout. In the chart below, the usual setup would be to enter on a break of the resistance level indicated by the horizontal blue line, and with a stop-loss below the recent low, indicated by the orange segment. The double bluff setup places the entry at the stop-level i.e. I enter where other people have there stops (and where I would usually get stopped out!). My stop was placed at the price level indicated by the red line segment, which gives me a safe level to let the trade run as a swing trade:

Here is the price action that immediately followed the breakout:

Increasingly I am seeing breakouts produce a deep pull-back before resuming in the original direction of the break.  This double-bluff provides a safer way of getting into the trade.

As I mentioned, the stop was set so that I could run a swing trade over a period of days.  As it turned out, the trade ran for a couple of weeks, until the end of the year:

A nice way to end the year!