Dax Technical Analysis 21/02/2017

Good morning traders!

We had a strong start to the week, despite the US holiday and lower than normal volumes. We gapped higher on open, breaking above 11,800 and finding our high of 11862 within the first 15 minutes of trading. After being rejected, price came back to attempt to close the gap. It took all morning for price to find the low of the day but it did not close the gap, potentially leaving some traders trapped in their shorts when price continued to climb higher for the remainder of the afternoon. Price eventually ended the session trading sideways, perhaps as expected with the non-existent US volume.

Greece popped its head up again today, reminding people that actually, yeah, there’s still a problem over there, so keep an eye on the developments there. Regarding high impact news today, we have the RBA minutes and Governor Lowe’s speech for AUD pairs, Governor Carney’s speech for GBP pairs and that is pretty much it until Thursday. I personally have just closed out a GBPJPY trade (long) at 141.455 as I am trying to lighten my exposure before 10 am tomorrow, that trade was closed in two parts, but overall it gained me (and the Gold subscribers) around 84 pips. I also have a EURAUD short open, but I am happy to let that run a bit longer.

Regarding Dax, the algo only traded once yesterday, opening a long around 11820, which is actually still open. I noticed that unfortunately there was an attempt to open a long around 12:30 pm which failed, due to a timeout error, which is an annoying FXCM/MT4 issue rather than a software problem my end. So perhaps I need to build an alert into the software so I know when the conditions are met, not just when the trade is opened (which is what it does already). Then I won’t miss those signals when FXCM decide to not open my trade!

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Dax Daily Chart

The current candle pattern formation looks to be forming the start of a bullish breakout above the 11875-11900 zone to begin a test of the 12000 and all time highs in line with the US indices and smaller Dax indices, especially with the touch of that longer term trend line a couple of weeks ago. However, perhaps we should be mindful of a double top possibility. I am watching Gold and Yen pairs as well as other indices as an indicator of risk sentiment, but at the moment, I am favouring the momentum. Bullish.

01 Dax Daily Chart

Dax Hourly Chart

We are right below the 11875 resistance level and have posted bearish divergence between price action and the RSI oscillator (standard settings), so be careful of longs at the moment. I am still bullish but aware that we could see a pullback. We still have part of that gap from yesterday to close, so if we do get a pullback, I suspect that this could be a good place to buy, assuming we retrace that far. We are in the top third of this range, so the reward to risk from current levels is not great.

So I am looking to buy, but perhaps from a better level.

03 H1 Dax Chart

Dax 5 Minute Chart

There is no “holy grail” indicator or one size fits all system that works in every market, but when I need a clue, I always tend to come back to what is referred to as a mean-reversion strategy. These strategies include RSI systems and Bollinger band systems. I like the latter on smaller time frames. This particular example is a 5-minute chart that has a 50 period BB with 2 standard deviations but based on the 1-hour chart. So it’s a 50 Hour EMA with 2 standard deviations, printed over 5-minute data. A bit unusual, yes, but it just allows us to take a simple high-level view, with granular detail available when we zoom in.

This one shows Friday as being a buy signal as it closed outside of the bands, twice, and was rejected, twice. Yesterday we pierced and closed outside the bands to the upside and are clearly at the top end of the range, it would suggest a move towards the mean is needed which supports the view of a retracement back towards that gap. It’s certainly no guarantee of a pullback, just a signal. We could just as easily continue to hug the upper band as the move continues higher (my preference).