What makes a pair a big mover? The technicals help contribute to the story.
How your trading can benefit from drilling down
Traders need to drill down to understand the full story.
For example, on this day, the NZDJPY was the biggest mover higher on a percentage change basis. Looking at the ranking from the chart below, the pair is up 1.00% from Friday (it is actually tied with EURNZD for the largest % change on the day).
So what is going on with that pair? What makes it so special in the eyes of traders at this point in time?
Maybe there is a fundamental story to the move?
China? Commodity prices? HMMMM not so sure about that fundamental slant. China's economy is slowing. So that is not a bullish story for the NZD which relies on strength from China. How about commodity prices. New Zealand is reliant on commodities for meat and dairy. If anything - those prices are scraping bottoms - again not all that bullish for a commodity currency like the NZD.
How about JPY weakness? Well, the BOJ's Kuroda is trying to convince the market that further stimulus is not needed (click here for story). So that should be supportive to the JPY. It should not weaken it like we are seeing in the NZDJPY's move higher.
When looking at currency pairs - whether NZDJPY or any other pair for that matter - thinking through the fundamental story is not a bad idea. Try to connect the dots from what you know.
What happens when the fundamental story does not fit the price action?
When that happens - like seems to be the case with the NZDJPY - it is time to look deeper into the technicals. The technicals help give a reflection of the buying and selling by market traders. What are they saying in the case of this currency pair?
Looking at the daily chart, the price of the pair has been basing against the 100 day MA (blue line at 79.62) for the last month. Moreover, that moving average line is getting flatter (less bearish). What the chart is showing currently is the price moving further away to the upside, and looks to close at the highest level since November 2nd. In addition, the price has moved back above the 38.2% at 80.441.
So off the daily chart, the bias is more bullish with the price being above BOTH the 100 day MA and the 38.2% retracement. BULLISH.
What if you were to drill down further and look at the price action on the hourly chart. What is it saying?
The price action has been up and down of late. However, on November 27th, the price fell below the 100 and 200 hour moving averages (blue and green lines) and held below the 100 hour MA on the correction higher on that day. That is bearish and helped lead to a retest of the lows in trading on November 30th.
Now, when the price could not move below that low, and when the price moved back above the 100 and 200 hour MAs and the 50% retracement at 80.413, the sellers turned to buyers and the price surged higher.
One can say off this hourly chart trade analysis, that technically the price bias turned BULLISH on the re-break of the the 100 and 200 hour MA lines (blue and green lines). Putting it another way, there were technical reasons to buy on those breaks.
Can we dig deeper and get any clues from the 5-minute chart? Why not look?
The trading on November 30 started with the price of the NZDJPY moving lower - continuing a downward channel started during the previous day. That bearish bias started to lose momentum with a break of the topside trend line and then on the move above the 38.2-50% "correction zone (yellow are near the bottom of the chart), and the 100 and 200 bar MAs (blue and green MAs on the chart below). It is clear to see, that the move above the trend line and then the MA was the start of the bullish bias today (at 80.15), but there was still more upside resistance that needed to be broken.
Later when the 100 and 200 hour MAs (stepped blue and green lines) were broken, the technical pictured turned increasingly more bullish, and upside momentum kicked in (see chart below).
Well. when the price trends like the NZDJPY did on November 30 I like to put a Fibonacci on the trend legs to measure the 38.2-50% "correction zone". Stay above that correction zone and the trend remains in tact. Move below and the trend may not be fully over, but the momentum may turn to more consolidative.
Looking at the chart, the last leg higher took the price from 80.53 to 81.25 (see chart above). The 38.2%-50% "correction zone" comes in at 80.89-80.97. If the price can stay above that area (yellow area at the top) and above the lower trend line, the buyers remain in control. If that area is broken, the trend move may indeed be over. Traders can prepare for a correction.
This drilling down exercise in hindsight may not do much for your trading from where the traders sits RIGHT HERE, but the progression - the drilling down - can be done in the future to pick potential turning points.
- Take a look at the daily. See what it is saying.
- Then the hourly and see what the price action and tools are saying there.
- Finally, the 5 minute chart.
Doing so, may open some low risk trade ideas that could benefit your trading, or at least get you out of a losing trading, when the fundamental story does not match the technical story.