EURCHF breaking 1.5100: A textbook perfect breakdown and reversal

Last night, EURCHF finally broke below the 1.5100 zone after weeks of consolidation around the area. See Figure 1 for a daily chart of EUR/CHF. I just happened to be looking at the charts when this breakdown occurred last night so I made a few day trades. These scalps turned out better than I thought because a particular technical analysis phenomenon worked really well on this move. Referring to Figure 2, a 5-min. chart of the move, you'll notice that I've marked some Fibonacci levels on each of the big dive in prices. While there are several Fibonacci levels that are notable and commonly used, I pay attention to the 50% retracement level almost exclusively. A half retracement is easy to spot even with the naked eyes without any technical analysis so even those that don't use Fibonacci can see it. With this hypothesis in mind, I shorted EURCHF a few times last night on the bounce to 50% of each of the move. The first entry was at 1.5048. EURCHF retraced about 50% after that big dive from 1.5080 to 1.5030. Then it formed a descending triangle on the 1-minute with the support at 5050. A nice round number support level. The entry was triggered near the end of the triangle and right when it broke the support. I held on to this short looking for the move to take us all the way down below 1.5000 since there's bound to be lots of stops there (which never happend last night probably because of SNB intervention). Before that though, we made another quick dive and then retraced 50% again. I shorted some more with a limit order placed at the 50% level before hand. So I had two positions sitting from 5048 and 5039. See Figure 2 at the bottom for a chart with the levels marked. However, by the third dive, it is now obvious that the move down is getting smaller and smaller. Then when the 50% level of that last move held for like eternity, and numerous tests of resistance at 5030 failing yet didn't back down by much every time, I took profit at 5027-5028. The reward/risk ratio were impressive with these trades. I risked a few pips to make 10-20 pips. However, one mistake I made which made all these efforts wasted. Simply put, I did not have enough position size to make these pips gained worthwhile. Being used to swing trades with much bigger stops, I merely used my usual lot size for these trades. The reason being that I didn't expect these to go so well since I've always been burned by day trading and was just testing the water with these days. Oh well, these could all have been just because I was lucky last night. In hindsight, I could have saved myself from all that stress and made a lot more simply by betting on SNB intervention as many traders have done. Recall [my lesson on fundamental analysis and the SNB pegging up the EURCHF market][]? Well, last night presented a great opportunity to profit from that open secret again when EURCHF tested 1.5000. The reason why I didn't go long is because it was just too obvious that SNB would come to the rescue. I thought that they would have waited for running the stops below 1.5000 before intervening (note to self, don't second guess). Well, it seems that obviousness works. The optimal entry for a long EURCHF would have started at the point when I covered for the same reasons. I should have eased in a long position around 1.5030 with stop at 1.5000. A reasonable profit target would have been 1.5100. Why 1.5100? Aside from that the fact that it's an obvious resistance, this is just something I noticed while drawing up the chart for this post. In Figure 2, I've drawn the 161.8 % Fibonacci extension levels for those 3 down moves discussed. See that they formed the reversal targets perfectly with equally impressive textbook perfect consolidation reaction afterwards? If the price action adhered to the Fibonacci retracements so well as described above, it's no surprise that a Fib. level would work well for the reversal too. Just because the same people are probably involved with the move down as well as the move up when all these happened within mere hours. So two lessons from last night.

  1. I should pay more attention to the 161.8% level in my analysis along with the 50% level in the future.
  2. and more importantly, don't think the central bank (e.g. SNB) will not intervene just because everyone is milking them out.

[caption id="" align="aligncenter" width="580" caption="EURCHF"][EURCHF]EURCHF[/caption] [caption id="" align="aligncenter" width="580" caption="EURCHF, 5 min."][EURCHF, 5
min.]EURCHF, 5 min.[/caption]

[my lesson on fundamental analysis and the SNB pegging up the EURCHF market]:

Posted 26 November 2009 in forex.

Bought +1 BC 100 OCT 09 12.5 PUT @1.95, mark 10.81

Here's one last try in shorting Brunswick Corp. BC gapped open about 50 cents this morning on an analyst upgrade. It subsequently tested \$11.00 with about 5 times first 30-minute volume. It has since been in a trading range. Why is this significant? Observing Figure 1, we can see that \$10.85 is the 62% Fibonacci level of the entire drop from Sept 19, 2008. Practically exactly a year ago. Secondly, this huge volume at open is good as it typically signal retail/pubic euphoria. Combining the two, huge volume retail push + test a long term resistance = shorting opportunity! In the near term, BC is also testing a resitance as shown in Figure 2. Finally the stars may be aligned for a short in BC. I have tried many times and failed miserably in the past several weeks. But after analysing my trades and re-evaluating my method, this setup offers a very good chance. So let's see how it goes. Entry: \$10.81 Stop: \$11.00 by end of next week. Target: \$9.00, the next Fibonacci level. Reward / Risk = \$155 / \$45 = 3.4. (These values are obtained by estimating the premium of this option at expiry using the Bjerksund-Stensland approximation.)

[caption id="" align="aligncenter" width="580" caption="Brunswick Corp"][Brunswick Corp]Brunswick Corp[/caption] [caption id="" align="aligncenter" width="580" caption="Brunswick Corp (30-minute)"][Brunswick Corp (30-minute)]Brunswick Corp (30-minute)[/caption]