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AUDUSD SSI Shifts to Net Buyers
DailyFX.com -
Talking Points:
-Volatility Expansion Remains Muted
-6 of 12 Pairs Reflect a Sentiment Signal Change
-AUDUSD sees a large shift towards buyers as the pair sells off
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 therefore a follow through of the breakout is more likely.
Though directional movements have picked up over the past few weeks, volatility expansion remains muted. Of the 12 pairs we watch for breakouts, nine of them are showing depressed levels of volatility which may cap the potential for breakouts. Additionally, we have a US holiday on Monday May 25 so trading may be muted next week as many Americans take holiday leave. Remember, for breakouts to generically be successful, we ideally want to see volatility on the rise.
DailyFX Plus Breakout2 Conviction Chart for May 22, 2015
ADX | ROC | Volatility Expansion? | Sentiment Signal | Conviction | |
EURUSD | Trend | Neutral | Yes | Bullish | 2 |
AUDUSD | Trend | Bearish | No | Bearish | 2 |
GBPUSD | Trend | Bullish | No | Neutral | 2 |
NZDUSD | Trend | Bearish | No | Bearish | 2 |
USDCHF | Trend | Neutral | Yes | Neutral | 2 |
USDCAD | Range | Bullish | No | Neutral | 1 |
USDJPY | Trend | Neutral | No | Neutral | 1 |
EURJPY | Range | Bullish | Yes | Bullish | 1 |
GBPJPY | Trend | Bullish | No | Bearish | 1 |
CHFJPY | Range | Bullish | No | Bearish | 1 |
AUDJPY | Range | Bullish | No | Bearish | 1 |
EURAUD | Range | Bullish | No | Bullish | 2 |
Bold and italicized ratings illustrate those pairs whose conviction ratings changed from the previous report.
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Another interesting development is the frequency of sentiment signal changes. 6 of 12 pairs showed a changed in the sentiment signal. So if the signal changed from Bearish to neutral or Bullish to neutral, that represents an SSI reading that doesn’t have a strong conviction in one direction or the other. Generally speaking, many of the SSI readings have been tame with an occasional outlier. In month’s past, the GBPUSD and EURUSD was at an SSI extreme and it produced a clearer conviction. As noted below, the AUDUSD is now hitting the radar of a strong sentiment shift that is beginning to touch extreme levels.
Before getting to the AUDUSD, let’s close the book temporarily on the EURUSD. Last week, we noted the EURUSD and to “grow more cautious of a drop back to 1.10”.
The EURUSD is sitting in the 1.10 handle as we publish today. The picture of future direction is more uncertain for the EURUSD at this point. SSI has come down as the retail traders got this one right. We will maintain the ‘2’ rating if the EURUSD pops higher off the support.
Today, we would like to focus more on the AUDUSD. We anticipated this week, via twitter, a break below the black support line.
As prices approach .7800, there is horizontal support and channel support in play. A break below these levels would likely accelerate losses which would help the Breakout2 strategy.
To add fuel to this fire, traders have been shifting towards long positions on this move lower in price. Compared to last week, there are 27% more longs now and 37% less short traders. This is a large shift that has moved the SSI reading to 2.06.
As a result, the conviction rating for the AUDUSD was increased from a ‘1’ to a ‘2’ in anticipation of a possible break lower.
AUDUSD 2 Hour Chart
(Created using FXCM’s Marketscope charts)
Last Week’s Conviction Chart – EURUSD SSI Stabilizes at -2
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 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 and “Bullish” means SSI is sign up for a free trial if you don’t have a live FXCM account) and view the Speculative Sentiment Index section (SSI).
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.
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education
The DailyFX Plus Breakout2 strategy can be automated. If you wish for the trades to trigger automatically into your account, register for a Mirror account which provides you access to dozens of other strategies as well.
Follow me on Twitter at @JWagnerFXTrader.
See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.
Feedback? Email Jeremy at jwagner@dailyfx.com
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