Euro (EUR) bank notes

The Quality of the EURUSD Signal

The weekly EURUSD formed a perfect bullish reversal candle last week. Unfortunately, it’s the “good for nothing” kind of signal, because it appears against the broader context. Don’t be too eager to play this reversal on the buy side, because the setup has a terribly contradictory context. A swing up is not impossible, but based on our stats it happens less than 20% of time due to the well established and incomplete bear trend.

+/- EURUSD signal bar – week 37

First, let’s go through the signal attributes. To better understand the parameters, review our previous post about ideal reversal Signals here.

Candlestick chart of EUR against the USD highlighting last week's reversal
Understand the reversal signal attributes of last weeks EURUSD reversal and weight in the context. Compare the attributes and the strenght to the inverse reversal at the top in May.

+ The bar closed at 1.2963 in the upper half portion of the weekly span of 1.2859-1.2979 and earned the first and most important check mark on the tally.

+ The close is very high within the bar, therefore the upper shadow (the distance to the maximum) is not too significant; the bulls were aggressive all the way up until Friday afternoon (September 12).

+ And, what is more, the close is above the previous candle’s close.

+ The weekly bar broke below the previous bar’s low of 1.2920. We can observe a perfect level of overlap of 49%. This means that it trapped some sellers who came to the party too late.

+ Checking the volume (not shown) of the Globex futures contract (6E) we see an increase both on the signal bar and the last trend bar (large black candle).


– The span of the reversal is doubtful, because it fails to match the size of the strongest trend bars in the preceding downtrend (120 pips compared to 209-240 pips). I would rather go with something above 180 pips.

– There were no recent attempts to reverse the trend that are visible on the weekly time frame.

– The RSI reading of the reversal signal bar is 24, which is deep in the sustainable bear trend zone. This means that buyers will most likely trigger a rally that will only last a couple of bars.

Implication

Five reversal attributes out of eight – not bad. But, if we weigh in the context of the strong downtrend, we are better skipping this “bullish opportunity.”

A single bar is not capable of erasing such strong downward momentum. The ideal strategy is to wait for the rally to move an equal amount to the size of the candle (120 pips). If it can’t get, and stay above, the 1 R:R value of 1.3100, then it will likely move back down and take out the low of 1.2860.

Usually, the first bar that performs five out of eight attributes on Trader Skillset’s check list needs at least 2-3 bars (here weeks) to wear down the smaller time frame bullish excitement. Or, as we call it, to turn the bull signal into an “aging signal” that is very likely to cause a breakdown when the hasty bulls are forced to dump their positions.

Have you noticed how “The Wolf’s Prey” column here talked about the near future of the EUR/USD pair? “We like the idea of 1.30-1.31 being stiff resistance, and therefore, an opportunity for the bears within the next two weeks.”

This post explains why.

The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.

About Laszlo Nagyferenczi

Laszlo Nagyferenczi is a day trader, analyst and instructor as well as the creator of the proprietary Context-Momentum-Signal concept. He has authored over 200 blog articles about his unique approach to trading and the Elliott Wave Theory. His clients appreciate his ability to go from the theoretical to the practical i.e. all the way to the actual trade set ups. Originally hailing from Hungary, Laszlo is fluent in English and Hungarian with a long list of education credentials including BA in Economics, Certified Elliott Wave Analyst (CEWA), Certified Adult Educator for T-Groups, Professional Co-Active Coach (PCC) at CTI. The real education, though, has been the trial by fire in the markets, with real capital at risk.

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