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A False Breakout Happening Now in CAD/JPY

A False Breakout Happening Now in CAD/JPY

2014-01-08 15:45:00
Kaye Lee, Head Forex Trading Instructor

Talking Points:

  • CAD/JPY Breaking Daily Trend Line
  • Declining Wedge Pattern on the 4-Hour Chart
  • A Long-Entry Signal That's Flashing Now

The daily chart of CADJPY shows a portrait of price just beginning to break a line of support. As price pushes through, some will already consider this line of support broken. However, until the candlestick actually closes past it, it is possible that a false breakout may still develop. If that is the case, then the upside potential could extend to the previous high. That alone makes this situation worth trading.

Guest Commentary: Daily Trend Line Break in CAD/JPY

A_False_Breakout_Happening_Now_in_CADJPY_body_GuestCommentary_KayeLee_January8A_1.png, A False Breakout Happening Now in CAD/JPY

Of course, the level of granularity is insufficient on the daily time frame, so analysis of the four-hour chart is necessary as well.

On the four-hour chart below, we see a declining wedge pattern forming, which is a bullish formation. This is encouraging for a long trade as price enters an area of support defined by previous resistance and support. The supportive zone is estimated as 96.46-97.08.

Guest Commentary: Declining Wedge Pattern in CAD/JPY

A_False_Breakout_Happening_Now_in_CADJPY_body_GuestCommentary_KayeLee_January8A_2.png, A False Breakout Happening Now in CAD/JPY

Clearly, price is already at the support area, and thus, an entry opportunity may already be forming. The ideal time frame for this trade is the hourly, which allows for reduced risk and a more precise entry.

As always, the trigger chart should be scanned for bullish reversal divergence, pin bars, and/or bullish engulfing patterns.

In this case, the reversal divergence has already formed, ignoring the pin-bar entry on the left, which was already past at the time of writing. Price is currently moving sideways and providing a good opportunity to enter at a better price. With any luck, it will turn out to be a nice runner, as was the case yesterday in our EURAUD entry.

Guest Commentary: A CAD/JPY Entry Signal That’s Flashing Already

A_False_Breakout_Happening_Now_in_CADJPY_body_GuestCommentary_KayeLee_January8A_3.png, A False Breakout Happening Now in CAD/JPY

Although it is hoped that the first entry will work, traders should be prepared to give this trade two or three tries, as all supportive areas are zones, not precise lines. At this point, this is still considered a trend trade (rather than countertrend), and thus, risk should be adjusted accordingly in order to reflect that.

By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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