Anatomy of a Trendline Break

In Charts, Research on November 10, 2012 at 3:42 pm

I started stalking a trendline break of GBPCHF in May 2012.  By the time the six month trendline finally broke in late August I had lost interest and missed it.   It is a very technical trendline break and I prepared this analysis to see what I could learn.

Anatomy of a Trendline Break:

1. Image 1 below shows the entire trend from February to August which respects the yellow trendline fairly well.

2. Image 2 below shows that price is hugging the trendline throughout the month of June (the area labelled “A”) with some trendline breaks, but only one close below which quickly retraced the following day.  During this time the oscillator does not imply that price is overbought, on the contrary the histogram is negative and in a shallow range.  Price then launches higher again to point “B” at which time the oscillator is showing high overbought levels and suggests a change in trend could be around the corner.

3. After bouncing one more time off the trendline, price makes a lower high in the middle of August and then Image 3 below shows the final break and hold below around August 20th, with many daily candle open and closes below the trendline.  This is the first time since February that candles were opening and closing consistently below the trendline.

[More below, click into the post title]

4. Price gets caught in a no-mans-land between the 100 simple moving average (white moving average line) which is providing support, and the yellow trendline which is now providing resistance.  On about August 8th price spikes higher to test trendline resistance, and closes much lower.

5. With the trendline broken and tested, we can draw a new downward channel, as shown in Image 5 below:

6. Price probes lower, breaking the 100 simple moving average, then returns to test the new downward trendline as shown in Image 6 below.

7. The big round psychological support/resistance level at 1.5000 begins to be tested as shown in Image 7 below (area labelled “A”) which it struggles to hold. Price eventually breaks through and stops just above another round psychological support/resistance level at 1.4800.  By this time the oscillator shows the highest oversold readings in nearly 8 months which precedes a sharp move higher back to the channel trendline.

8. There were some fairly obvious or good risk/reward levels that could have been traded as shown in Image 8 below.  Of course, it always looks easy in hingsight, but this one did not take a genius.


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