Trading multiple currencies using tramlines – continued

You won't always get your chart analysis right on the first attempt, says John C Burford. Here's what to do when your trading isn't going to plan.

I will follow up on Friday's post today, because we are being offered a fairly common problem that arises when trading with tramlines the case of an overshoot. It's important to know how to handle overshoots. I'll give you a clue: sometimes, your first tramline placing just isn't good enough.

EUR/USD

Normally, you would expect the market to kiss the line and then move lower in a 'scalded cat bounce'. That is the ideal scenario.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

But later on Friday, the market rallied to the underside of the line alright but then kept on going to trade inside the trading channel again.

13-9-30-MWT-1

This overshoot would likely have resulted in protective buy-stops being triggered on short trades, which were taken on the tramline break.

Advertisement
Advertisement - Article continues below

However, this kind of action, where there is no clear-cut break away from the tramline, is not uncommon. And when this happens, the trader must start to question their tramline placement.

In order to do so, we have one more tool that will help us determine if the rally has exhausted, and to position short. It's known as the Elliott wave count.

13-9-30-MWT-2

Here are the waves off the 6 September low and I have an extended wave 1 (w1) and a strong wave 3. Then, on Friday, the market rallied to within pips of the wave 3 high.

That would be enough to call the Friday high as the wave 5 high. If so, then the next move is down.

But the kiss overshoot is unsatisfactory, which prompts me to search for a better tramline pair and this is what I come up with:

13-9-30-MWT-3

A slight adjustment can make a big difference

prior pivot point (PPP)

Advertisement
Advertisement - Article continues below

This looks better! I have now eliminated the kiss overshoot and this morning, the market has made a lower tramline break with a gap opening, and a small kiss in overnight trading, and now a move back down.

We could see a small rally back to the tramline in another kiss, but for now, the immediate outlook is bearish.

Finally, what does the close-up picture tell me?

13-9-30-MWT-4

The decline off the Friday wave 5 high appears impulsive with wave 1 down and w ave 2 up. As I write, the market is testing the support shelf connecting recent lows.

A break here with a solid down move would set up the probability that wave 3 was in progress, taking the market to much lower levels.

The key is a possible break of the 1.3460 1.3480 level.

Advertisement
Advertisement - Article continues below

And the latest commitments of traders (COT) data is revealing:

Non-commercialCommercialTotalNon-reportable positions
longshortspreadslongshortlongshortlongshort
(Contracts of EUR 125,000)Open interest: 254,464
Commitments
129,86264,0183,66272,759138,915206,283206,59548,18147,869
Changes from 09/17/13 (Change in open interest: 36,200)
28,899-5,038115-1,13144,55927,88339,6368,317-3,436
Percent of open in terest for each category of traders
51.025.21.428.654.681.181.218.918.8
Number of traders in each category (Total traders: 198)
4967134552102124

For the week ending last Tuesday, hedge funds (non-commercials) and small traders (non-reportables) ramped up their long positions (while lifting shorts) by a very wide margin.

On the other side of those trades, the commercials added to their short positions by the same wide margin. The swings were very large, as speculators bet on the continued rise of the euro.

But as history has demonstrated time and time again, when speculative sentiment has swung too far to one side, major turns are likely.

And with the hedgies now two-to-one long, the bull case is less and less persuasive.

EUR/GBP

13-9-27-MWT-6

The market was testing the support shelf in the 8,400 area.

Advertisement
Advertisement - Article continues below

In overnight trading, it moved even deeper into this support:

13-9-30-MWT-6

And my fourth tramline has just been hit with the gap opening this morning.

Remember, you can set third, fourth (and possibly more) tramlines to determine near-term targets, as I did here. They are most useful.

But with support giving way, the trend remains down.

USD/JPY

13-9-30-MWT-7

I have three superb touch points on the upper line. The lower line is of average quality with a PPP and one slight overshoot on the first touch point. These tramlines will be my working set for now.

And with speculators very long (COT data) in this market, the path of least resistance appears down.

Advertisement
Advertisement - Article continues below

In fact, the commercials (who are usually on the right side at major turns) are now almost nine-to-one short USD/JPY. I believe this is noteworthy!

The specs have bought into the continued depreciation of the yen, which was brought about by the Bank of Japan's QE (quantitative easing) programme. The commercials, on the other hand, don't buy it. This leaves me wondering: who will prevail?

Advertisement

Recommended

Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019
Visit/518908/betting-on-politics-28
Spread betting

Betting on politics: don't put your money on the SNP

Scottish voters are strongly opposed to another independence referendum, says Matthew Partridge. That opens up a few tasty punts against he SNP.
29 Nov 2019

Most Popular

Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600636/class-acts-going-cheap-buy-into-europes-best
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020