Bill Baruch, president and founder of Blue Line Futures, reviews and previews the euro, Japanese yen...
Spotting a Good Trade on Multiple Time Frames
08/16/2010 10:37 am EST
The US dollar index surged over 3% last week, which is actually a big move in the index.
It gives us a good lesson in how multi-time-frame confluence support can unite to form a powerful move and turnabout in price—as we can see in the weekly and daily charts.
I’ve been showing in my weekly intermarket report the two confluence levels of support to watch, and what to expect at each.
First, we had a nice confluence of the 50-week EMA and 50% Fibonacci retracement at the $81.50 level, and if the index failed to find support and bounce off $81.50, then the play was to expect a downward thrust to test the second and final price confluence at $80.
We ended last week right at the $80 level for a “make or break” support play, where a reversal or bounce up off this level was the expected play, but a downside break under $80 would be a game-changing bearish event.
As it were, the dollar index not only bounced off confluence support at $80, but surged off of it.
The confluence comes specifically from the 200-week SMA at $80.14 and the 61.8% Fibonacci retracement as drawn at $79.86. That converges about the $80 level.
Let’s now move to the daily chart to see more evidence of confluence at the $80 level.
Going into the week, we had price testing the 200-day SMA—a very critical average—at the $80.50 level as well as “riding” (going down with) the lower Bollinger band.
More importantly, price retested the prior support area from the April and February-to-March price congestion/support area also at $80.
With all the price support, the daily chart—and especially the intraday charts—formed positive momentum divergences as shown in the 3/10 momentum oscillator and other momentum oscillators (rate of change, etc.).
It’s often a good idea to take profits (if short) when price tests a confluence support area and forms lower-time-frame positive divergences.
Traders can also find good opportunities to get long in such a structure when price breaks a falling trend line, such as what happened on Tuesday, August 10 on the break above $81.00. That’s a more conservative “Prove it to me” entry.
An aggressive entry would be getting long as price tested $80, which allowed a tight stop under $80 or $79.50, depending on how much you wanted to risk. When price tests a major confluence support area, you can often locate your stop closer than you would be able to otherwise, which allows for explosive reward-to-risk ratios.
For now, keep focused on the $83 area, which is confluence resistance, and a breakout above there would be a further confirmation that a likely reversal has taken place, instead of a one-week retracement.
The more you study these patterns/situations, the better prepared you’ll be to recognize and then trade them in real time as they develop.
By Corey Rosenbloom, trader and blogger, AfraidToTrade.com
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