GBPUSD Wavecount Invalid

My latest wavecount for GBPUSD has become invalid, and I'll need to go back to the drawing board. I've realised that I've gotten lazy and neglected to look for alternative wave counts too. Do remind me if I don't include alternate wavecounts in my next analysis.

Meanwhile, I've found a rather interesting video on trading zones. Thought you might enjoy it. :) Can't seem to embed it here... so here's the link.

USD Pairs Gains from Better than Expected Existing Home Sales Report

CNN reports that Home sales rise on biggest-ever price drop and that the Dollar rebounds, but worries linger. This shows how negative the current sentiment is on the current markets. The Cable dropped slightly on the better than expected existing home sales report, but quickly recovered as shown on the chart below.


This is in-line with yesterday's post on the cable where we expected prices to rally. But since today is a public holiday - Easter Monday - trading volume has been rather low. I expect volatility to return tomorrow when more traders are back in action.

GBPUSD Forecast (23 Mar 08)

I hope the markets are treating all of you well. During the past few weeks where I had been busy, it appears that many things were happening with the markets! The one that most captures my attention is what's happening to Bear Sterns right now... $2 a share is just crazy!

Head & Shoulders Pattern for GBPUSD
ok, back to the main topic - GBPUSD. I'm see one of my favourite technical patterns on the cable right now - A break of the neckline of a head and shoulders pattern.

Based on traditional techical analysis, this pattern has a nice price objective of 1.95, or about 300 pips away from its current price of 1.9820. But I always like to look at the bigger picture to get a sense, and I'm always using Elliott Waves in my analysis. So I pulled up my weekly chart, which I had labelled many months back.

Weekly Chart



Please pardon me for the messy chart, it has afterall been labeled several months back. Based on this weekly chart, I'd say wave 5 of (5) has been completed and a much larger correction is now underway. Since the larger degree of wave (1) to (5) started way back in Jun 2002 with a price of 1.380, I'm expecting a rather significant (and somewhat scary) correction. Even if the correction retraces to the 38.2% level, that's still a drop all the way to 1.7993.

So that's the larger picture I'm seeing. What do I think is happening in the lower degrees?

Daily Chart

Based on the Daily Chart, and assuming that my wave labeling is correct, I think there's still a downside potential all the way to 1.8555. That is quite close to the 38.2% level (1.7993) I mentioned earlier.

But why 1.8555?

Assuming that GBPUSD is now unfolding an expanded flat, my Wave A could have been the end of the expanded flat correction. But the subsequent movement did not appear implusive to me, which indicates that there could be further downside potential. So if Wave (C) is not completed, then it could be unfolding as a zigzag. Pulling two fibs for Wave (A) and Wave A, there's actually a convergence.

[Afternote: Please note that there's a slight error in the chart. Wave (C) is 261.8% of Wave (A), not 161.8%]

At 1.8555, we have
i) Wave (C) = 261.8% x Wave (A) - For the expanded flat, and
ii) Wave C = Wave A - For the Zigzag.

Possible Approach to Trading


Using a 4-hourly chart, Wave i-v of Wave 3 is currently underway. Trading volume was low due to Good Friday, so we see that price had not moved much. But it seems like there is some upside potential. One could look to go short near 1.9940 which is wave 1 ended and also the 38.2% retracement level. Target should be around 1.9700. The stop loss should be around 2.0040 since wave iv should not overlap wave i.

Alternatively, you can look to trade the longer term and wait for wave 1-5 to complete instead of trading wave i-v. It all depends on your risk appetite and always remember to do good position management. Scale some profits out when you can, and leave some to run long term.

You can also consider trading the head and shoulders pattern with a price objective around 1.9800.

Alright, that's all I have for now. Good luck with your trading!

Fed Takes Aggressive Action to Improve Liquidity

I mentioned in my previous post that I was long USDCHF and short GBPUSD because I believed that the bottom and top were in place respectively. USDCHF has made a beautiful spike up from 1.0150 levels all the way to 1.0350! GBPUSD has fallen too, but not as much so I'll hold on to it for a little longer.

Although in Elliott Wave Theory, we do not say that events causes certain price movements, events and news are often the catalyst for the prices to move in the predicted directions. So what has been the catalyst this time? I opened my mailbox and CNN and my RSS Feeds have delivered a few interesting news feeds to me:

• U.S. trade gap rises to $58.2 billion in January, less than expected
• Federal Reserve unveils plan to lend $200 billion in Treasurys in an effort to 'promote liquidity' in financial markets
• Fed's coordinated liquidity steps boost dollar

Actually, I had expected US Trade Gap to drop, since USD is at all time lows and exports should be increasing, nontheless, a lesser-than-expected increase does strengthen the dollar.

What I'm confused over is the increasing of liquidity into the markets by the Fed. If memory serves me right, the last few times when the Fed actually pumped money into the economy to increase liquidity (that was around Sep-Dec 07 I think), the stocks loved it and rallied. But the dollar tends to drop on increased liquidity. This time round, it actually strengthened the dollar! I'm no economist, but sometimes, these things really makes my head spin! If there are any economic's trained people out there, feel free to let me know why this is so. Haha.

Alright, that's it for now. Take care, and good luck with your trades!

Commitments of Traders (COT) - Mar 08

The COT for Mar 08 is out, click on the following links for the currency that you are interested in:

COT 3/10 - EUR (Bullish)
COT 3/10 - GBP (Bullish)
COT 3/10 - CHF (Bullish)
COT 3/10 - JYP (Bearish)
COT 3/10 - CAD (Bearish)
COT 3/10 - AUD (Neutral)
COT 3/10 - NZD (Neutral)

Actually, the COT indicator is getting me somewhat jittery because I'm currently bullish on USDCHF and bearish on GBPUSD. However, this could be due to a temporary dollar strength that some people are looking for right now.

USDCHF has made a significant move downwards (counted 5 waves down), and I think a short-term low at 1.0133 is in place. And I'm looking for a short-term corrective rally.

Conversely, GBPUSD had made a significant move upwards (counted 5 waves up), and short-term high at 2.0220 could be in place. Thus I'm looking for a short-term correction downwards and shorting around 2.0100.

As you can see, indicators can give different perspective and you need to determine which you prefer. Of course, it will be so much better if everything is aligned....

Well, bye for now and good luck with your trading!

Commitments of Traders (COT)

I was talking about Commitments of Traders (COT) in an earlier post. I've recently found a site that actually provides some free COT charts. Nothing too fancy, but I think you may find it quite a useful reference. You will need to register with them to get the login details though, but considering that its free, it might be useful to check out.

Here's the link : Commitment of Traders

Using Pivot Points

Sorry folks, I really hadn't had the time to trade much these two weeks, and markets were pretty much consolidating... well at least until the bad NFP news came out and the dollar tanked to all time lows.

But rather than getting into some forecasts today, I thought I could share about a nifty little tool that I use from time to time when not using Elliott Wave. In fact, its one of the first few tools that I had been using, just that I got lazy and stopped using it. But its really a pretty good tool.

What are pivot points?
Pivot point is a tool that actually provides potential support and resistance and helps minimize risk. Originally employed by floor traders on equity and futures exchanges, pivot point have proved exceptionally useful in the FX market. In fact, the projected support and resistance generated by pivot points tends to work better in FX (especially with the most liquid pairs) because the large size of the market guards against market manipulation. In essence, the FX market adheres to technical principles such as support and resistance better than less liquid markets.

How do I calculate pivot points?
Pivot points can be calculated for any time frame. That is, the previous day's prices are used to calculate the pivot point for the current trading day for daily pivot points, and the previous week's prices are used to calculate the pivot point for the current trading week for weekly pivot points.

There are a few formulas for calculating pivot points, but the classic one is as follows:

• Pivot Point for Current = High (previous) + Low (previous) + Close (previous)
• Resistance 1 = (2 x Pivot Point) – Low (previous period)
• Support 1 = (2 x Pivot Point) – High (previous period)
• Resistance 2 = (Pivot Point – Support 1) + Resistance 1
• Support 2 = Pivot Point – (Resistance 1 – Support 1)
• Resistance 3 = (Pivot Point – Support 2) + Resistance 2
• Support 3 = Pivot Point – (Resistance 2 – Support 2)

We can create our own pivot calculator by putting these formulas into an excel spreadsheet, or use one of the free online pivot calculators. Of course, it will be so much easier if our charting program generates the pivot points automatically for us. If you use metatrader, you can find the pivot point tool to add into your list of indicators.

How do I use pivot points?
As mentioned above, pivot points actually provide potential support and resistance (S&R) levels. So one can use this for any S&R type analysis - clustering of S&R levels, breakouts...etc.

But before we go into that, lets look at some interesting statistics:
Of the 2,026 trading days since the inception of the euro as of October 12, 2006. (* Source: Investopedia )

• The actual low has been lower than S1 892 times, or 44% of the time
• The actual high has been higher than R1 853 times, or 42% of the time
• The actual low has been lower than S2 342 times, or 17% of the time
• The actual high has been higher than R2 354 times, or 17% of the time
• The actual low has been lower than S3 63 times, or 3% of the time
• The actual high has been higher than R3 52 times, or 3% of the time

How can we use this information? Well, if a pivot point coincides with a previous high/low, and the price moves near the pivot point, we now have the probabilities we need to make a long/short trade and place our stops behind one of these pivot points. Be careful though, if we use a daily pivot, these levels are only good for their respective days. So we will have to monitor our position daily. If we intend to do longer term trades, we may consider using the weekly or monthly pivot points.

There are a few other interpretations of using pivot points. Some say that prices will tend to move towards the central pivot point, so if prices are below the pivot point one should look for opportunity to long, vice versa.

Others wait for the price to break the pivot point and use the breakout strategy on that.

Identifying Trends using Pivot Points
The pivot points are sometimes useful in identifying trends. Simply look at the sequence of central pivots to see if it has an up- down- trend. And we can use it to you advantage by following the trend. For example, if the trend is up, we can always look to long at either the S1 or S2 levels, and if the trend is down, we can look to short at either the R1 or R2 levels.

This coupled with our other tools for analysis can help to identify good risk-reward trades.

Are pivot points related to Elliott Waves?
Being a supporter of Elliott Waves, is there a relationship between the two? No, there isn't. Elliott Waves utilises Fibonacci levels rather than pivot points, and doesn't use pivots in any way. But there's nothing to stop a trading from using pivot points together with EW. In fact, pivot points are sometimes found to cluster togther with other fibonacci levels - making for good trades!

Video on Pivot Points
Here is an interesting video on using pivot points. Please note that I'm in no way affiliated to the author of the video, and am not suggesting you sign up for anything.



I just want to take you readers for visiting my blog, and hope you find the information here useful. Happy trading!

OzFx Forex System

Terence just pointed out a forex system available on a website (yes, for free), that appears to have pretty good trading results. I've yet to test it out yet, but on my first reading, I think there's potential and that its a valid strategy.

Do check out OzFx Forex System for yourself. :)