Pennants

Let me continue my series on chart patterns in the post. Last time I wrote on flags and now I want to discuss about pennants. In the same fashion as flag, a pennant is a continuation technical structure. It means that when the formation is broken you will most often see a thrust in the direction of a previous move. While a flag is a rectangular in shape a pennant resembles a triangle. It should not be confused with triangle as its duration is much shorter and it actually is a short respite before current trend resumes itself. Triangles tend to be longer in duration before they are broken. 

As it is a triangle in shape a pennant has two converging trendlines. This shows that prices are consolidating after a previous move and now the range inside the pennant is narrowing putting pressure for price to go out of the pattern and continue the trend. A pennant will have a pole that would end at the top or bottom of the pattern (depending whether the pattern bullish or bearish) and it marks the point of the first trendline that we expect to be broken. As the prices start consolidating the second point is made that marks the point from which the second trendline is drawn that will probably not broken and hold counter trend moves. 

When you are through with the article, read my other posts on the topic and watch the video below:

Bullish and bearish flags

Wedge technical pattern

How to do technical chart analysis

Triangles

Head and shoulders

 

Watch a video on how you can trade this specific technical structure:

Bullish pennants

Bullish pennants are bullish continuation patterns that break out in the upward direction when the consolidation of the structure is over. A break of the upper trendline is a sign that current trend will resume itself after a short break. One should be ready to jump into a trade at the break of the upper trendline. 

How to trade it

You can look at gbp/jpy chart above to see how the bullish formation looks like and where you can enter your long trade. After a strong move upwards gbp/jpy started consolidating and formed a bullish pennant in a period of four days (from 27^th of December 2012 till 31^st of December 2012). The breakout point was marked by 139.28 level which the pair reached and retraced a little. So, you should have bought the pair at the break of the above mentioned level. Our stop level was a few pips below the retracement at 138.87. As you may see the pair broke the level and rallied around 350 pips before reversing and forming another pattern: bullish flag. You could exit your position in portions at even numbers (if you had two or three positions) or move your stop loss order by placing them below 4 hour candle clusters till your stop loss was closed when prices reversed. 

Bearish formations

Bearish pennants are bearish continuation patterns that break out in the downward direction when the consolidation of the pattern is over. A break of the lower trendline is a sign that current trend will resume itself after a short break. One should be ready to jump into a trade at the break of the lower trendline. 

How to trade a bearish structure

You can look at Gold chart above to see how the bearish pattern looks like and where you can enter your short trade. After a strong move down xau/usd started consolidating and formed a bearish pennant in a period of five days (from 15^th of February 2013 till 20^th of February 2013). The breakout point was marked by 1600.00 (per ounce) level which the security reached and retraced a little. So, you should have sold Gold at the break of the above mentioned level. Our stop level was ten bucks above the retracement at 1610.00. As you may see the pair broke the level and collapsed around 45 bucks before finding support. You could exit your position in portions at even numbers (if you had two or three positions) or move your stop loss order by placing them below 4 hour candles till your stop loss was closed when prices reversed. It may have been around 1563 area. 

Conclusion

A pennant is a continuation pattern that might help you to enter extra positions in the direction of the trend or open your first one if you accidentally missed the initial move. The pattern indicates that the security is in a stage of rest (consolidation) and the prices will move pretty soon. In forex market pennants often last five days or even less and present you with great trading opportunities. 

Ok, I will finish now. Be sure to read related articles to learn more on technical analysis. I promise to expand on this in my future posts. 

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Vytas.

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Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

Fortunes are made when trends change

Markets present a lot of opportunities for short term, intermediate term and long term traders when specific market conditions appear for those who use appropriate trading system for specific market conditions. It is of uttermost importance for those who monitor market swings and trends to capture a change in the trend at the very inception of it, enter position or line of positions and then take a good bite off the move which follows (if it does). Every year these kind of moves do develop in currency markets as well as in other financial markets. Being a daily follower of various currency pairs I take daily advantages of day trades, short term swings and likewise eagerly wait for those big moves. As Jesse Livermore once said:” Big money is in big moves”. Big market sharks wait for these as they can easily double their capital when trends change. Whatever trader you are be aware that big opportunities lie for you if a trend comes and you better set aside other type of strategies and do some trend trading. 

When you finish with the article read other related articles and watch a few videos on the topic:

How to make money in trading breakouts

Short lived momentum reversal trading strategy

Trading supply and demand

Spotting market trends change

Nicolas Darvas trading system

Looking at the current picture in Forex I predict that a shift in Yen trend is about to happen. You probably know that various fundamental factors (mostly verbal threats about stimulation from Japanese government and Central bank officials) cause Yen to collapse tremendously since the middle of November 2012. However, the price action over the last few months in most of Yen pairs show that the downtrend of Yen has probably exhausted itself and an uptrend (in Yen) may start any time now. What are my arguments for this statement? I have a number of factors how I identify when a trend changes and I want to present them in the article. Let us look at them.

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An uptrend line has been broken in most of Yen currency pairs

If you look at gbp/jpy (Pound Yen) and eur/jpy (Euro Yen) pairs you will clearly see that the trendline in the pairs has been broken. I drew the trendline from the point where the ascent of the currencies started. That is not the lowest point. A trendline (in my definition) has to connect two points (without piercing the price) (it may connect more) from the lowest possible point (in uptrend) to a major correction point (look at the chart to see what I mean). So, if the 13^th of November is the lowest possible point for (gbp/jpy) drawing a trendline and the major correction point is the 26^th of February we can clearly state that the trendline was broken yesterday (the second of April). For eur/jpy pair the starting point is the same as that of gpb/jpy (13^th of November) and the major lowest correction point is the 25^th of February (day earlier than for the British pound). Now, for eur/jpy the trendline was broken even earlier than for the pound (17^th of March) and the price went under the trendline (on the 21^st of March). Remember, if price goes through (does not matter whether price closes or not) the trendline (it is broken). 

After major correction prices failed to reach higher highs

That is another rule that I look for while trying to identify whether a previous trend is really over and we are going to see a major reversal. Both pairs (gbp/jpy and eur/jpy) meet the criteria. Pound Yen pair made a lower high (highest point after correction) on the 14^th of March and failed to go beyond that. Euro Yen pair reached the lower high (the second peak) on the 11^th of March and now is playing around with the lowest point that was reached during major correction (26^th of February). A failure to reach higher highs shows that the uptrend clearly lost its’ steam and a possibility of a downtrend increases sharply. Trendline break and lower high rules can be seen not only in gbp/jpy and eur/jpy, but also in cad/jpy and partly in nzd/jpy (it modestly went above the peak of 14^th of February and then went down). 

Bank of Japan has so far done only verbal promises about stimulus (no real actions yet)

Real Yen downtrend started when Bank of Japan and government officials started talking about necessity of stimulus, weaker Yen, end of deflation and other bla-bla-bla type of stuff. However, nothing has really been done in practice yet. These were just talks. Today we gonna see how much of what they were planning to implement will be done in reality (interest rate decision release should be accompanied by some kind of statement about stimulus). The market has already priced in huge stimulus on the part of the Bank of Japan. If it does just that or less, Yen will definitely strengthen and the downtrend will shift to uptrend. I do expect 1000 pips + collapse in most of Yen pairs from current levels. 

Of course, you never know what the Central Bank of Japan officials have prepared. They may introduce much stronger stimulus than they had initially planned. If, however, they just do what they promised Yen will definitely rise as most of the future events are already priced in by the market. So, let us wait and see what happens today and for the remaining of the week. 

I do not expect the downtrend to be very fast (1000 pips a day), but downtrends are usually faster than uptrends, so I am getting ready for a nice ride down. I am risking around 10 percent of my deposit on the trade at the moment. Even if I expect to increase my capital substantially I always place stops and on these longer term trades I would not risk more than 15 percent. I risk 2-3 percent per trade on my day trades. When you prepare for a trade you have to think in terms how much you can afford to lose, not how much you are going to make. This is how you control risk. You do not want to risk all of your capital on some probable windfall. No, my plan firstly is to stay in the market long term and secondly – to make money. Opportunities always arise, so I do not need to worry about squeezing every possible dollar from the market or trying to do a ‘home run’ every week. This is not healthy psychologically. Think about risks first and profits will take care after themselves. 

Entry levels

A classical way to jump into a starting trend is on the break of the major correction low. That is the place where the second point of the trendline is drawn. For eur/jpy it would be a break of 118.70 level (February 25^th low). For gbp/jpy it would be a break of 137.81 (February 26^th low). I would follow the rule for eur/jpy pair as I do not see other better way to enter a possible downtrend in the pair. However, this rule might be somewhat modified looking at the current technical structure of some Yen pairs. I basically mean gbp/jpy. There is still quite a substantial distance to the major correction low. Around 300 pips at the time of writing. If you look at the daily chart of the pair you will see that while trying to reach a previous peak the pair failed and formed a nice reversal pattern (8^th of March through the 1^st of April) with support at 142.00 level. That level was another choice for entry having in mind that trendline was broken and the pair failed to reach previous high. I did enter short below 142.00 and placed a stop loss at 143.45. If I am wrong and the downtrend will not start any time soon I will not lose much. If, however, the pair collapses and reach major correction low I will already have a substantial profit and be able to consider extra positions on the way down and increase my profits as a result. So, I have taken care of my risk (losses) and if my predictions are right profits will take care after themselves. If the break really occurs I will open extra positions in other positions and try to do some pyramiding too. 

Possible exits

Exits are a little more complicated and far more important than your entries. You never know how far the markets will go. My targets maybe too optimistic and price may never go to the place I assumed it will go to. Therefore it is essential to trail my stops. In case of a downtrend, weekly highs could be a possibility. This is for intermediate and long term trends. That is what I am expecting for Yen pairs. 

One way that I will use this time is placing some of my exits near previous resistance, which is now support. Looking at weekly chart I see that 134.00 (for gbp/jpy pair) is a logical place to close at least some of my positions. 

Another is to exit at a place where the move really started accelerating. The philosophy behind this kind of closing a trade is the idea that price always comes back to the place it came from. Applying the rule for closing a trade above the support it would be 130.00 level for gbp/jpy.

The third possible scenario is to calculate the difference between the top of the move with the major correction low and subtract the difference from the major correction low. The difference between the top and the major correction low (in this case is about 1000 pips). So, the last closing target would be 127.00 level (almost exactly the place where the price started accelerating upwards). 

You can do your own calculations for eur/jpy or any other Yen pair. If the opposite trend does develop all of the pairs will fall (Yen will rise). If you decide to take these short trades be sure to calculate your risks. And be even more careful if you decide to pyramid your trades (open a number of positions). 

As you can see the rewards for these kind of long term trades are much bigger than possible losses. This is the reason I am willing to risk more than I do on my swing or day trades. 

Do not forget that big money is in big moves and fortunes are made when one identifies a change in trade and executes his trades in the direction of the move with proper entries and exit levels. 

Let us see what happens with Yen!

Ok. I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Vytas.

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

gbp/jpy

Bullish triangle  (11^th of February 2013)

You can clearly see that gbp/jpy formed a bullish triangle on hourly chart and nicely broke it today. I haven’t traded the pair for a while because it was heavily oversold, but this could have been a good opportunity. I was in other securities when it broke out upwards. Reversal patterns is the thing that you have to look for when you want to jump back into the main trend and find a correct entry point for doing that. Reversal patterns is the thing that you have to look for when you want to jump back into the main trend and find a correct entry point for doing that. A break of 146.65 point would have been a good entry point (5^th point in the triangle). As the pair near resistance you should have exited by now. Of course, you might expect new highs. In that case keep it, but tighten your stops. The trend remains bullish. 

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http://www.etoro.com/A41516_TClick.aspx

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

Pound is still in uptrend  (7^th of February 2013)

It was interesting to watch price action in pound pairs today. For no clear reason most of pound pairs jumped up way before BOE rate decision was announced. Is the downtrend in pound over? Maybe, maybe not. It has not started in gbp/jpy yet though. I do not like trading BOE rate decision as I know that we always have ECB coming after them and also having a press conference. I see the latter much more important as the former and you can see it for yourself from today’s price action. Action started after Draghi press conference. Remember the fact. Buying pound on dips against Yen is still the choice for those who love the pair. 

The only pound pair to buy (5^th of February 2013)

gbp/jpy is the only pound pair where you can buy pound, because the only weaker currency than pound Yen is. However, if you look at price moves in the pair it is not such a weak move after all. It is better than most other Yen pairs, except eur/jpy. So, if you are a great pound bull concentrate on the pair waiting for dips to buy as Yen downtrend is nowhere to end yet. We need fundamentals to change. In this case, bank of Japan has to fail to act on what they have promised: a lot of easing. This isn’t happening at the moment. So, Yen is a sell and pound is a buy on dips.

Still above breakout level (4^th of February)

gbp/jpy broke resistance of 144.75 on the last day of January and has been staying above the level ever since. Do not be surprised if the pair goes back beyond the level. Much depends on what Bank of England rate decision is. Nobody expects a lot of changes, but as expectations of analysts often go wrong we should not rule the chance that BOE will do something to build in trust in British pound. If it does not pound can still go up against Yen, but it will probably not be the best pair to play against Japanese Yen. It (pound) will fall against other currencies too. 

Cable got hit (2^nd of February 2013)

Pound hit on the last day of the month and yesterday. It is obvious that market is running on expectation regarding Non Farm payrolls. However, if the number comes out disappointing all of the gains of the cable can be erased within one hour. It is very risky to hold large positions at the time of the release. I would prefer waiting till a few minutes before the release and then placing stop buy and sell orders above and below 4 hour charts. And these would be very small. I am also looking at gold. That could be an even better trade then currency pairs. Follow the market whichever direction it takes. 

Resistance is broken (31^st of January 2013)

gbp/jpy surpassed my expectations today by breaking 144.75 resistance. Well, I guess my expectations were not in line with the markets. I hoped the pair to stay in a tight range till Non farm payrolls, but traders are trading worse than expected numbers before the release. Nothing will probably change till next week interest rate decision from Great Britain and Europe. If the stance of those remains the same the trend of gbp/jpy and its’ ‘sister’ eur/jpy will probably continue to be upwards. 

FED rate decision (30^th of January 2013)

Yen was pressured by most currencies today. No wonder why. We have FED interest rate decision coming at 19:15 GMT. This could increase volatility in gbp/jpy tremendously. The pair managed to rise to 144.40 resistance today and bounced off the level. It is very important level as it was hit for the third time in two weeks. In previous two times the price of gbp/jpy collapsed after hitting the mark. Today’s event will determine whether the resistance will be taken out or we will see 142.00-141.80 and possibly 141.10 support levels. I will be monitoring price action during the news is released with some orders to buy and sell breakouts of 4 hour candles. 

Consolidation (28^th of January 2013)

British pound retraced around 200 pips against Japanese Yen in two days after having made a huge rally on the 24-25^th of January. Bearish comments from the future governor of the Bank of England cause the pound to slip across the board. Support is now at 142.50-30, resistance starts at 143.20-50. Despite weak position of the pound in general, its trend towards yen is upwards and one should look for opportunities to buy near support. 

Flag in the pair (25^th of January 2013)

I told you about a bullish flag that gbp/jpy was in. Well, today it was broken. As you may know a breakout of a pattern usually occurs when the fifth point of the pattern is made. 143.10 was the last fifth point. The pair briefly retraced after it has reached the point. It would have been a good point for a stop loss and a buy stop order for a breakout would have to be a few pips above 143.10 level. The resistance is at 144.75. I think it will be reached today. Nice ride! When you are on such a trade you should move your stops placing them below 1 or 4 hour charts with an exact take profit point. Do not forget to take off your profits before weekend. Who knows what might happen! 

Big rally (24^th of January 2013)

The pair managed to overcome its’ resistance of 140.80 today and rallied more than 100 pips. It was a nice move, but gbp/jpy reached its’ resistance of 142.00. Another level stands at 143.00. We have to watch what happens around these levels. We might be in bearish head and shoulders pattern formation and that could take the pound to much lower levels. If price goes to 141.00 level I will wait for a reversal pattern to start buying during European or American sessions. Not earlier! I am not selling the pair yet.

Head and shoulders? (24^th of January 2013)

Ok, so 118.30 level resistance was taken out and Yen dropped more than one hundred points after this breakout. Now, 120.00 area is very important as the pair has a potential to form a bearish head and shoulders pattern and reverse downwards for months to come. I would take profits at the level and watch what happens there. New highs as always are possible. However, opening new positions the market after it has rallied more than 100 pips is not a very smart idea. Be patient and learn how to day trade the smart way. Do not be greedy. 

New lows and rejection of them (22^nd of January 2013)

gbp/jpy failed to show such bullish action as eur/jpy did today, but a bounce of 139.80 level was pretty strong. Looking at hourly and daily chart we can see a few scenarios developing. One is that there could be one more bullish flag developing in gbp/jpy pair. In that case, the lower part of the flag 139.80 serves as support and 143.00 acts as resistance before it is broken upwards. The second scenario is that the bullish move is over and we are going to see a collapse in the pair. Pound is hitting support again and again, which means lower prices are more than possible. Possibility of head and shoulders pattern is also there. If the second scenario comes true we may  see gbp/jpy going to 135.00 area very fast. 

Visiting support (21^st of January 2013)

Pound bumped into some serious support area. I do expect it to bottom on hourly chart. Wait for consolidation at the levels for a day or two. The way upwards is blocked by 200 simple moving average on 1 hour chart. BOE minutes should give stimulus for the pair on Wendensday. If no serious fundamental changes come gbp/jpy will continue going up. Stay away from trading when prices are moving sideways. Breakout trades could be good here when consolidation is over of prices jump upwards. 

No new highs (18^th of January 2013)

Contrary to eur/jpy, gbp/jpy pair failed to make new highs yesterday. It means that if you want to short Japanese Yen it is better to do by buying Euros and selling Yens. Pound will probably visit its’ most recent support at 142.50-141.65. This is the area where further drop should be stopped and opportunity to enter new longs in Pound. I expect some bullish signs at this level. It most probably be some bullish candles or 123 pattern. I am not buying if those above mentioned support levels are not reached. 

Two pairs correlate (17^th of January 2013)

Whatever happens to eur/jpy also happens to gbp/jpy. Pound has gone up around 260 pips today and this might not be the end of the move. Pound created bullish reversal pattern (123) near the bottom and then rallied strongly. It has broken resistance area of 142.45-95 and now seems to be reversing somewhat. It most probably is some profit taking. Support is now at 142.20, resistance at 143.50 and 144.75 (very important). Buying on dips is my strategy for the pair. 

Bulls getting stronger (16^th of January 2013)

I am not as bullish about gbp/jpy as I am about eur/jpy, but today’s price action in Pound Yen pair shows that Pound bulls are getting stronger. The pair is now facing resistance of 200 sma on 1 hour chart at 141.95 level. However, 2 bullish candles on 4 hour chart give hope that the resistance will be taken out and the pair will try to go to its’ most recent top of 145.00. If price breaks current resistance of 200 simple moving average next resistance area is pretty strong and comes at 142.50-143.00 level. Buying on dips is a possibility.

Hourly formation fulfilled (15^th of January 2013)

gbp/jpy has followed its ‘aspirator’ eur/jpy today. The pair formed head and shoulders pattern on hourly chart and collapsed through first support level and hit the second one. Previous support is resistance now and support is at 141.50-60 level. 200sma on 1 hour chart should act as support at least for some time. However, you should not be surprised to see more resistance from Yen bulls at these overbought levels. I am not in a hurry to buy Pounds till I see some bullish signs of bullish candles or reversal patterns. I am standing aside now. 

Reversal (11^th of January 2013)

After a very strong move yesterday gbp/jpy is reversing today. It is quite natural as most traders are taking their profits. This downward move is more influenced by closing profitable positions rather than reversing their positions and going short. Although the uptrend might be over it is not logical to reverse your position as long as there are signs of a reversal. I have marked two support levels for the pair in the chart below. More corrections are possible now as gbp/jpy has rallied a lot since the middle of November – 1800 pips. 

123 pattern (10^th of January 2013)

gbp/jpy had a false breakout downwards on the 8^th of January. The pair however reversed sharply after forming 123 reversal pattern and has been going up for a few days now. The ascent accelerated today led by rally in Euro. So, British pound follows Euro in this rally and Euro appears to be a leader in this move against Japanese Yen. Pound has not recorded new highs as Euro did and we should be watching 142.75 level very carefully as it is resistance now (most recent top). Support is at 1.4150 now. 

Triangle in short term charts (8^th of January 2013)

The technical picture of gbp/jpy is pretty much similar to that of eur/jpy. We do have a triangle on 1 and 4 hour charts. 50 sma on 4 hour chart is below the price. It adds to the bullishness of British pound. The pair has formed a similar pattern just before New Year, which was broken upwards on the 31^st of December. The pattern was smaller, but the move was pretty impressive.  I expect the same for the pair. However, you should not forget that the move can be downwards too, not only upwards. 

BOE rate decision will probably push the pair out of its’ current cage. Let us be patient till tomorrow and see how market reacts to Bank of England monetary policy update. 

gbp/jpy outlook (7^th of January 2013)

gbp/jpy moves in tandem with eur/jpy pair. So, analysis of these two pairs will often be quite similar. Pound moved out of its’ summer ranges a little later than eur/jpy and in this Yen sell off it follows Euro as it remains one of the strongest pairs against Japanese Yen. November the 14^th was the day when real advance started. In terms of pips, Pound gained a little more than eur/jpy. I like the gbp/jpy pair, because it is very volatile and forms very strong moves. 

The sentiment for the pair remains bullish as long as reversal signals appear. The pair is in a small range of 140.16-142.06. Lower high may form and if that happens a break of that lower high could be a trigger to enter longs. A break of the above mentioned support (140.16) can be a trigger to go short. gbp/jpy is above 200sma on both 1 and 4 hour charts. 

The pair will probably continue trading in the range till Thursday when BOE interest rate decision is announced. That will certainly push the pair to new levels (higher or lower). Day traders could take reversal trades at opposite sides of the range. Swing and trend traders should wait for new tendency to develop.