Picture Perfect Parallels

Stocks Straight Up!

Look at that set of parallels! It's a thing of true beauty!

EUR/USD Currencies: Too Far, Too Fast

After the plunge in the value of the Dollar over the past few days, I have begun to think that the Dollar had fallen too far, too fast. Likewise, the Euro had climbed against the greenback too far, too fast.

This wasn't surprising, given the shock delivered by the Federal Reserve on Tuesday. Even with the Federal Reserve's notice that it was reducing rates to 0%, and its new strategy of quantitative easing, the Euro had been rising rapidly (Dollar falling rapidly) for at least a week before the Fed's shock. By looking at the daily chart of the Euro (not shown, this chart shown here is the intraday for today), I couldn't help but notice that even the opening prices occurred outside the Bollinger Bands. That phenomenon can be easily seen on my previous posts of the Euro and Dollar over the past few days. That means that prices were printing at three to four standard deviations outside the norm. The statsitical probabilities of that occurring, much less being sustained at that pace, are astronomically and statistically small. Interestingly, today's retracement, as shown on the daily chart, is a relatively small one.

Needless to say, that is a parabolic price move by any standard or measurement. It is unsustainable for more than a few days. With such a rapid and powerful movement, we are more likely to see a Cahen bubble pattern rather than a long, sustained set of parallels (see earlier posts explaining the two, or Cahen's book). Thus, as I was reviewing my charts last night and noticing such extreme price movements, I began expecting either a regression to the mean (reversal) or a consolidation for a few days until the bands -- and market sentiment -- can catch up. We may then see another strong movement higher (for this chart, the Euro).

Does that mean the Dollar downtrend/Euro uptrend is over? Not necessarily, but we certainly need to take a breather for a few days, at the very least. After such a monstrous move in the currency markets so quickly, a consolidation period is not only warranted, it is expected. In fact, the more extreme a movement is, the more likely the market is to reverse rather than merely consolidate. We'll know which it will be within a few days. My bias is for further downside to the Dollar, but now that I have acknowledged my bias, I will try to ignore it in trading.

I have noticed also that after such a forceful and fast movement, there are often unintended consequences, or perhaps better said, unexpected effects, that follow within a few days. These unexpected effects tend to amplify the original movement. Forces are set in motion that become almost unstoppable, and we never know what those forces will be or what they will unleash! Sometimes those forces take a few days to creep through the financial system and take effect. Hence, my bias for a deeper Dollar plunge. But no one really knows. Anything can happen in the financial markets.

Soybean Parallels Continue Into Evening Session

The Bollinger Band parallels pattern for soybeans has continued into the evening trading session without any sign of let-up. I must keep in mind, however, that continued soggy weather in the grain belt will tend to be bearish for soybeans, if farmers are forced to grow soybeans instead of corn. Soybeans have already surfaced as the most active grain for trading this evening.

Soybeans: Picture Perfect Cahen Parallels

Here is a picture perfect "parallels" pattern (left side) as described in Cahen's book, "Analyse Technique et Volatilite". Because the moving averages in the second panel haven't begun to contract toward one another, this set of parallels may continue during the evening session tonight. Parallels are the most profitable pattern that Cahen teaches in his book. However, they are also the most difficult to trade, because they tend to move in a lengthy, sustained trend rather than a short burst, as the bubbles do. They tend to have more erratic up and down movements within the higher trend. Note that only about 10 of the 42 candles in this chart move upward in a forceful way. Interestingly, however, we also notice how well they remain contained between the Exponential Moving Average and the Bollinger Bands. Exiting a set of parallels is also more complicated than a bubble pattern. Cahen recommends exiting the pattern based upon the two moving averages in the second panel. If it appears that the two moving averages will cross within the next three candles, he suggests liquidating 50% of one's position. He says to exit the remaining positions once prices close below the Bollinger Moving Average. Often, a set of parallels on one time frame will be composed of a set of bubbles or smaller sets of parallels on the next lower time frame (see the right side of this chart). I prefer to trade the bubbles on the lower time frame, entering and exiting various times.

Soft Soybeans, Corn

The two charts shown at the top of this post are 3 minute charts of corn and soybeans. They are decidedly bearish today, but the bearishness lacks strong conviction. This is understandable, given the strong fundamentals for continued global demand for grains. However, note also the strong selling on the daily soybean chart at the bottom.

In these two charts, the Bollinger Bands are very important. The Bollinger Bands on the soybean chart are forming a "bubble" pattern, and the Bollinger Bands on the corn chart have formed a "parrallels" pattern, per Philippe Cahen in his book, Analyse Technique et Volatilite (yes, written in French). Both are profitable, but the bubble pattern tends to burn out more quickly and be less profitable, whereas the parralels pattern tends to extend itself over a longer period and be more profitable in the long run. Interestingly, a series of bubble patterns on a shorter-term chart will often form a parallels pattern on a longer-term chart.

Soybeans

Corn

Soybeans Daily Chart

The two primary indicators that I look for in deciding whether to go long or short are a crossover of the Exponential Moving Average, and a downturn in the Klinger Volume indicator that crosses above or below its moving average. Both of these conditions are showing right now on the daily soybean chart, shown here below. However, today hasn't closed yet, so until this occurs, a bearish trend in soybeans has not been confirmed. The bulls could easily step in and drive prices higher, perhaps even reaching a higher close today. Even if this happens, the bullish momentum on the longer-term charts is showing signs of waning, and exhaustion appears to be in the cards (see daily chart below). This has been a great bull run!

Most likely, at the end of a very strong trend, we are more likely to see a consolidation of prices at a fairly high level, rather than a complete reversal. Even if a consolidation occurs and a trading range sets in, this sets up my favorite trading conditions as a swing trader. Further, after a consolidation period of several weeks or even months, another break-out could occur and prices could move still higher.