NASDAQ: What is significant about last week’s range?

Did I make this homework question too hard? I admit it was a little more difficult – but hey, that’s trading for you. If it were easy everyone could do it, right?

Here is the Japanese Yen chart and I asked you:

Can you analyze this yen chart?

1. Would you say this market is more bullish or bearish? Why?
2. Based on your answer to #1, where would you expect prices to go to next?
3. Do you see anything tradable here?

#1: Of those of you who took the time to reply you all identified that the Yen was at an important support point. Why? Because if the market continued below the April lows it would be the first time since the rally began in January that support did not hold. Most of you also identified that the market broke trendline support, which tends to be significant and that a trend change would be likely (1).

So while everyone saw the Yen was in an uptrend (bullish) most also assumed that they Yen was changing direction because of the trendline break. But here’s the tricky part: the market remains in an uptrend UNTIL support fails. Notice that prices made a new swing high (2)? That means that the market is still bullish and no matter how bearish the market might look (trendline break) the market does not become bearish until it breaks a significant swing low (3).

#2: Based on your answer to #1, most were looking for prices to retreat lower. I would have agreed with the assessment if the sell came after the breach of support (3), but a simple trendline break is not enough for me to get overly bearish.

One thing I would have considered after the trendline break is that the market might be signalling the end of the bull trend but not UNTIL we saw a re-test and failure of the highs (2). Therefore, after the trendline break I might have expected a rally back to 9300 to cover the gap on the daily chart (not shown) and I might have expected the Yen bulls to fail here as sellers jump back on the selling bandwagon. As it turns out the rally last week was much stronger than I anticipated and it seems as though the buyers remain in control at this time.

#3: Was this current setup tradeable? I would have said no. I would need a little more information before I could determine who was controlling the market. A break of support at (3) or a rally back to the highs (2) and a failure, would have put the sellers clearly in control and would have made shorting the Yen an easy trade with good probabilities of success. But until that happened, it would be a 50/50 proposition as the market had been trading sideways for the better part of a week indicating a very balanced market.

I think what was the big lesson in this chart was that you need to be careful reading too much of your own bias into your analysis and I don’t say that from a soap box. Keeping my own personal bias out of my analysis and focusing on what is on the charts is something that I struggle with day-to-day. Some days it’s easier than others but the danger of imposing your ideas on the market is always there – and usually they’re wrong.

As a trading friend of mine used to say “the big money’s always on the surprise side�?. And last week’s Yen clearly showed us that.

This week let’s look at the NASDAQ market.

Question:

1. Is this market bullish, or bearish?
2. Name 3 important support and resistance prices where the market is likely to stall?
3. What is significant about last week’s range (the last 5 bars)? What does it look like?

Post your answer in the comments section below, or send it to me by email if you prefer.

Enjoy this week’s issue,
Erich
erich@supportandresistance.com

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