How I Analyze the Markets - Part 3 of 4
Chart Setup - After I have analyzed this market on the monthly chart I move to the daily chart. The daily chart shows the monthly pivot points. Looking back at the monthly chart for a moment, in a downward trend it is expected that the monthly candle continue to make lower highs and lower lows. With this thought in mind let's now go back to our daily chart and look at the monthly pivot points plotted. Since the monthly candles are expected to make lower highs and lower lows I am only interested in pivot point resistance level R1 and support level S2. Why, you may ask? This is because R2 is always plotted above the previous monthly candles High and if the downward trend is to resume the daily price levels should never reach that level. I am however interest in R1 because it is always plotted on the chart at the high of the monthly candle and it is possible for price to retrace up to this level of resistance before continuing downward. For the same reasons I am not interested in S1 but I am interested in S2. S1 is always plotted at the low of the previous months candle and if the market is in a downward trend price should move below the previous months low to keep the downward trend intact. The reason why I am interested in S2 is because this is the price level a large number of floor traders and financial institutions expect price to move too before the end of the month. I do not expect price to move down to S3 in a downward trend because the space between S2 and S3 is considered to be the area in-which price would be considered oversold. It normally takes an important news event, either scheduled or unscheduled to cause price to move below S2.
The Analysis: Price started the month below pivot point "P" indicating a bearish bias for the market. Whenever price is below "P" I want to be a seller. However I never got a valid Short Trader Setup. Instead price moved back up through "P" at which time I turn into a buyer. Price then formed 3 candles that look like Dragon-Fly doji's indicating indecision as to move higher or lower. A candle closing above the high of the first doji (the one with the small red body) is a signal to go Long. However this long trade signal should not be acted upon because price is right up close to R1. R1 is where I expect price to turn back down if the downward trend is to continue. Sometimes price may not turn back down right at R1. Sometimes price will move up past R1 a short ways before turning back downward. Sometimes price will not make it all the way to R1 before turning back down to resume the downward trend, and sometimes price will move right up to R1 and turn back downward. So, I think of R1 as an average price level where price will turn back downward to resume the downward trend.
I notice that the last daily candle was a small candle. Small candles at or near a resistance level is usually a heads up that price my be ready to reverse directions. However, knowing this candle was formed on a Friday, and knowing Friday's are not high volatility trading day's am ignoring this early warning indicator.
In conclusion: Price is now close to resistance level R1. I am looking for a reversal candle pattern to signal this currency pair is ready to start moving downward to support level S2.
The Analysis: Price started the month below pivot point "P" indicating a bearish bias for the market. Whenever price is below "P" I want to be a seller. However I never got a valid Short Trader Setup. Instead price moved back up through "P" at which time I turn into a buyer. Price then formed 3 candles that look like Dragon-Fly doji's indicating indecision as to move higher or lower. A candle closing above the high of the first doji (the one with the small red body) is a signal to go Long. However this long trade signal should not be acted upon because price is right up close to R1. R1 is where I expect price to turn back down if the downward trend is to continue. Sometimes price may not turn back down right at R1. Sometimes price will move up past R1 a short ways before turning back downward. Sometimes price will not make it all the way to R1 before turning back down to resume the downward trend, and sometimes price will move right up to R1 and turn back downward. So, I think of R1 as an average price level where price will turn back downward to resume the downward trend.
I notice that the last daily candle was a small candle. Small candles at or near a resistance level is usually a heads up that price my be ready to reverse directions. However, knowing this candle was formed on a Friday, and knowing Friday's are not high volatility trading day's am ignoring this early warning indicator.
In conclusion: Price is now close to resistance level R1. I am looking for a reversal candle pattern to signal this currency pair is ready to start moving downward to support level S2.