Friday, February 6, 2009

Noise and Signals

EUR/GBP, 1H, 29 Jan - Today

This chart tells a nice story, if you knew how to read it. I've put the turn of events in different colours, together with their respective annotations.

1) Cups and handles--see the black outline, it's meant to look like a cup and handle (duh right)--can be bullish. In this case, after the formation of a nice U-shaped cup and a slightly downsloped handle, a trader would wait for a positive breakout above the rim level of the cup.

2) In this case that did not happen, and the price tested the resistance (in blue) thrice. It then gave up.

3) Prices are strange creatures. When they can't go in one way, they'll gladly do the opposite. Since they couldn't break resistance, they went in the other direction and plummeted. Previously I spoke of flags in bullish formations; here, the flags (in dark green) are in reverse. As usual, the profit target for a flag is the length of its staff. You can see that happening here.

More than a week's worth of hourly candles for this story to unravel. Who knows what's to come in the next chapters!

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