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23/08/2009 16:06

August 23rd, 2009

 

EURUSD’s outlook remains bid as the rise from the April 22, 2009 low continues to unfold with the December 18, 2008 high of 1.4718 as the next objective. Only a daily open and close below 1.3850 will complete this rise while the August 5, 2008 high of 1.4446 caps. For the week ahead, look to buy EURUSD within the 1.4195-1.4264 zone for further price extension targeting 1.4446, 1.4620 and 1.4718. 

GBPUSD’s rise from the April 22, 2009 low remains active as ONLY a daily open and close below 1.6031 will complete this rise while the August 5, 2009 high of 1.7042 holds.  As for the corrective fall from 1.7042, this fall reached 1.6274 on August 17 and remains active as only a daily open and close ablve 1.6567 will complete this fall with prices then continuing to move higher within a 1.6567-1.6749 consolidation zone.  Should prices open and close on a daily basis within the above mentioned zone, a sustained break of this zone will see further price extension in the direction of the break.  

DJIA-the Dow Jones Industrial Average has reached our 9433 target as sited back in our April update with last weeks close of 9506, as prices will need to close higher this week to confirm the fall from the 2007 high of 14,198 is complete at the March 2009 low of 6488.  A close higher this week will see continued upside risk as prices move within a 9433-11,249 consolidation zone before another attempt to the downside.  Failure to close higher this week along with a close below 9433 would suggest that the move up from 6488 may be complete as ONLY a daily open and close below 8,357 would confirm this outlook.  However, the rise from the March 2009 low of 6488 remains active as ONLY a daily open and close below 8,357 will complete this rise while Friday’s 9506 high holds, as prices will then continue to move lower within a 7202-8,357 before another attempt to the upside.

Gold-As to the broad outlook, gold prices remain firm as the rise from the October 2008 low of 680 remains active and reached 1,005 in Febuary 2009, as ONLY a daily open and close below 881 will complete this rise while 1005 holds.  As to the meduim term outlook, prices again remain firm but continue to move within a symetrical triangle pattern with higher lows and lower highs suggesting a break out is imminent and will certainly occurr before the end of September.  The sysmetrical pattern has some very unique characteristics and provide very unique trading opportunities.  By connecting the lower highs and higher lows, the trend lines extend and the triangle pattern takes shape. You could also think of it as a contracting wedge, wide at the beginning and narrowing over time.  As the price action consolidates over time, sellers begin to sell at lower highs while buyers begin buy at higher lows.  Eventually, one group overwhelms the other and the result is a dramatic breakout, with the momentum and duration of such breakout directly proportionate to the duration of consolidation.

 

 

Below I have listed essential triangle or symmetrical triangle pattern criteria, all of which apply to the current pattern witnessed on the daily charts for XAUUSD (Gold/USDollar). 
                                                                                      
1. Trend : In order to qualify as a symmetrical pattern, an established trend should exist. The prior trend should be several months old and the symmetrical triangle marks a consolidation period before continuation or trend reversal. The current trend is consolidating as prior to this consolidation pattern was in a very bullish rise from the October 2008 low and mist recently from the April 2009 low.                                        
2. Four (4) Points : At least 2 points are required to form a trend line and two trend lines are required to form a triangle. Therefore, a minimum of 4 points are required to begin considering a formation as a triangle. Ideally, the breakout occurs after 6 points (3 on each side).  At this writing there are 4 lower points and 2 upper points.
3. Volume: As the triangle extends and the trading range contracts, volume begins to diminish. Such has been the case the last few weeks.  This is known as the quiet before the storm, or the tightening consolidation before the breakout.  
4. Duration: The triangle can extend for a few days to a few months and is directly related to the recent trend. In this case, gold reached a low recent low of 864 on April 20, 2009 which was essentially 38.2% of the October 2008 low and the February 2009 high. As the 38.2 held, this suggest the trend remains firmly to the upside as was witnessed in the weeks following the April 2009 low. In the current pattern, the duration is 15 weeks whereas if the pattern were less than 3 weeks, such a pattern would be considered a pennant and almost always results in a continuation of the prevailing trend. 
5. Breakout Time Frame: The ideal breakout point occurs 1/2 to 3/4 of the way through the pattern’s development or time-span. The time-span of the pattern can be measured from convergence of upper and lower lines. A break before the 1/2 way point might be premature, as occurred on the June 6, 2008 pattern break, while a break too close to the apex may be insignificant.  After all, as the convergence of the trend lines approaches, a breakout must occur.  Going back the April 2009 low, the current pattern is already more than 3/4 complete and a break out will certainly occur at anytime and certainly within the next 3-4 weeks. 
6. Breakout Direction: The future direction of the breakout can only be determined after the break has occurred. Sounds obvious enough, but attempting to guess the direction of the breakout can be a bit tricky. However, the medium and broad term trend remain to the upside and symmetrical patterns tend to be continuation patterns.  
7. Breakout Confirmation: For a break to be considered valid, it should be on a closing basis with a price (3% break) or time (sustained for 3 days) filter to confirm validity.  However, in that the current pattern duration is more several weeks in duration, a daily open and close above 970 or below 920 at this juncture will see further price extension in the direction of the break.  As the breakout unfolds, an expansion in volume will occur.  Additionally, as often occurs, once prices break above or below the trendlines, a retest of the trendlines as support or resistance usually occurs, thus allowing opportunity to enter a position once the breakout is confirmed.   
8. Return to Apex: After the breakout (up or down), the apex can turn into future support or resistance. The price sometimes returns to the apex or a support/resistance level around the breakout before resuming in the direction of the breakout. Two points of interest here are the June 2009 high of 990 and the April 2009 low of 864. 
9. Price Target : There are two methods to estimate the extent of the move after the breakout. First, the widest distance of the triangle can be measured and applied to the breakout point. Second, a trend line can be drawn parallel to the pattern’s trend line that slopes (up or down) in the direction of the break. The extension of this line will mark a potential breakout target. Using the parallel trend line method, the initial upside target price is 1,062 while to the downside the initial target is 802. 

Conclusion: The current consolidation pattern is nearing its end, with p otential for a breakout to occur within the sometime over the next 4-5 days.  Finally. this pattern has a very reliable history as seen in previous breakouts which occurred in 1995 when after the symmetrical pattern, the US dollar rallied for 10 months, in 1996, after the symmetrical pattern consolidated for 5 months, the US dollar rallied 10 months, in 1998 when the US dollar rallied 26 months (wave 3), 2002 when the euro rallied for 36 months, and finally in 2005 the US dollar rallied for 8 months, and in 2006-2007 when the EURUSD rallied for 12 months, all subsequently to triangle consolidation patterns. However, all of the above examples occurred after significant consoldation for several weeks. As stated earlier, there is a direct correlation between the duration of the pattern and the intensity of the break. 

More updates later.

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