Talking Points:
-GBP/USD SSI becomes more extreme at +2.0
-Market conditions improve for a GBP/USD breakout strategy
-Range conditions prevail for the most pairs
The DailyFX Plus Breakout2 strategy is one of the more widely followed by traders. This piece aims to identify those markets where breakout conditions are prevalent, and thus a follow through of the breakout is more likely.
This past week has been a heavy news week with four central bank rate announcements plus the United States jobs report from earlier today. We have seen volatility increase this week as a result of the news and currencies like the GBP continue their trends.
Next week will bring clarification if the increase in volatility is here to stay or if it was a blip on the radar.
We are beginning to see trends develop, though in a relatively low volatile environment. Add to that fairly tame SSI readings and the conditions, though better, are still difficult for breakout strategies. As a result, be VERY selective if you choose to employ breakout strategies in this market environment. Also, remember, that not implementing a breakout strategy IS a strategy.
However, the GBP/USD is being upgraded this week from a conviction rating ‘1’ to ‘2’.
GBP/USD 4 Hour Chart
(Created using FXCM’s Marketscope charts)
Upon inspection of the chart above, it appears GBP/USD recently completed blue wave 4. If this is the case, then this move lower should unfold in impulsive fashion and likely push below the January 2015 low.
So far, the price action does appear to be impulsive. We are currently near the grey mid-line of the 2-4 channel. We possibly have the lower half of the price channel to trade. With SSI sporting an elevated +2.0, the ingredients have improved for a follow through lower in the GBP/USD.
Therefore, this week, the GBP/USD joins the GBP/JPY as the pairs with a ‘2’ rating below.
Bold and italicized ratings above represents a change in the rating from last week. The only change was upgrading the GBP/USD from ‘1’ to ‘2’. Though breakout conditions have perked up beginning mid-week this week, next week will provide more evidence if the volatility was due to a changing market or news events.
As you can see in the chart above, the ADX and Rate of Change (ROC) are grouped together. Since the ADX doesn’t indicate direction, only strength of move, we want to couple it with a rate of change indicator.
When trading a breakout strategy, ideally we would like to see prices in a trend and moving. This would increase the chance of a breakout that would follow through. If prices are in a range and if the ROC is neutral, that indicates there isn’t prices are comfortable near the current levels until a catalyst creates discomfort for the price.
Ideally, we would like to see a directional move take place with expanding volatility. Expanding volatility can be measured through analysis of ATR range or perhaps volume expansion.
The fourth item is sentiment as read through FXCM’s SSI. The result of the “Bearish” means the SSI reading is > 1.22.
When taking this together and a conviction reading is assigned. It is important to understand the conviction reading is the opinion of the author and not a recommendation to trade, use, or not use the DailyFX Plus Breakout2 strategy.
A conviction rating of ‘3’ means the ingredients exist for a breakout market condition that the Breakout2 strategy enjoys. A reading of ‘1’ represents a mixed bag and that the Breakout2 strategy is more at risk of a market condition that doesn’t cater as well to breakouts.
For example, the GBP/USD was given a ‘2’ conviction due to an extreme SSI reading of +2.0.
Therefore, the conditions exist for a potential follow through of a breakout in the GBP/USD, if a breakout trade sets up.