AUD/CHF 8/11&12/06 - RSI & Fib Retracementi Analysis - Loren Morlen
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I attach daily and 30 minute charts of the above pair prepared subsequent to the market close on 8/11/06, together with the following comments.
DAILY:
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This chart provides four Fibanocci periods. Each period identifies points A, B and C incident to their Fibanocci retracement study. The majority of retracements occur between 38.2 and 61.8. In order to constitute a valid retracement a daily candle body should close above 38.2 in the case of a down trend and below 38.2 in the case of an up trend.
Period I identifies a down cycle from A to B and a retracement up with a candle close above 38.2 and below 61.8 identified as C. This retracement suggests the down cycle to be medium strong with a target price of 80% of A to B subtracted from C. There are two methods for entering a short position subsequent to the high at point C (new point A). The first is to require a candle close the high of which must be below 38.2 of the prior period when RSI is below 50. The second is to require a candle close the high of which must be below 25 of the prior period when RSI is below 50.
Period II identifies a continuing down cycle from A to B followed by a retracement to point C suggesting the prior down cycle is medium strong. Target price is .8277 (80% of A to B subtracted from C). One of the two methods mentioned above may be used to re-enter short subsequent to the high at point C (new point A).
Period III identifies another down cycle from point A to B followed by a retracement to C. This retracement presents a different appearance than the two previous retracements from B to C.
The two previous retracements occurred in less than half the time as the retracement in period III which suggests weaken of the down cycle. Furthermore the last retracement moved higher (closer to 61.8) than the two previous periods. These observations are a warning that the prior down cycle may be weaken.
Nevertheless this retracement suggests lower prices with a target price determined as mentioned in the two previous periods. It is also noted that the price low at point B, .8256 exceeded the target price predicted in the prior period II @ .8277. Since the down cycle is showing signs of weakness no re-entry short is suggested.
Period IV identifies a failed down cycle and probable trend reversal. A to B note a down cycle, the low of which is lower than period III. B to C retracement shows a candle close the low of which is above 75 which suggests the end of the down cycle on a daily basis. Price moved up through the expected retracement range of 38.2 to 61.8. This retracement suggests the prior down cycle is very weak and will probably fail. The low made subsequent to IV, C @ .8490 will act as new point A for an up cycle. RSI now traces above 50 on this chart.
Comments:
There is no monthly chart for review. Weekly chart shows RSI above 50 thus supporting the notion of higher prices.
RSI low @ 26.13 occurred on 8/30/05, with a price low in the 8880 area. Subsequent to this date price moved lower while RSI troughs progressively moved higher. RSI suggests that prices below the 8880 area are lower than supported by RSI strength. The 8880 area is an important support /resistance area on the daily chart. Previously this level acted as support and should act as resistance going forward.
The issue on the daily chart is whether price will break through the 8880 level and find support at this point. If so a longer term up cycle will be underway. If not then we may expect a resumption of the prior down cycle.
30 MINUTE;
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Five Fibanocci retracement periods are disclosed in this chart.
Period I identifies the RSI and price low and high during the initial up cycle. RSI low @ 27.12, price @ .8551, RSI high 79.03, price 8553. The 100 level starts at the price and RSI low and moves to the price and RSI value shown on the chart. Subsequent to the low @ .8551 price continued to move lower while RSI troughs and peaks moved higher. RSI strength suggested that prices were over extended downward and that price would return to .8551 or higher.
Period II this period starts with the price low @ .8501, point A and moves higher to point B, price .8583 and RSI high value. Retracement to C shows no candle close below 38.2 thus the prior up cycle is strong. Entry long when a candle, the low of which closes above 25. This period shows that price easily exceeded the .8551 level mentioned previously.
Period III, begins with the low at point A and moves to the price high at B. Both of the RSI peaks were lower than the previous period RSI high value suggesting that price is moving ahead of RSI strength. Point B to C is a retracement with a candle body closing below 38.2, suggesting the up trend was still strong.
Period IV begins at the low price point A and moves to the high price , point B. During this move higher RSI peaks continued to move lower, again suggesting price was over extended and ahead of RSI strength. From the high point B price retraces down through 75 with candle bodies, the highs of which closed below 100, thus suggesting the up cycle was ended. The issue in the 30 chart is whether period IV should be relied upon as a true trend reversal in which case we would exit our long position.
Period V starts with the price low .8501 and moves to the price high .8673, thus measuring the next longer cycle. >From point B to the latest point C we observe a retracement in the 38.2 to 61.8 area with an apparent move up from that point. This retracement period suggest that the up cycle is medium strong. Re-entry long in the same manor describe above except we use the 30 chart RSI 50 level, the daily chart must also be above 50.
Comments:
Market forces frequently drive price higher or lower than supported by the actual strength of the move. In some instances we see gaps up or down which are normally soon closed by market forces which recognize the gap. More frequently the market sees excesses in up or down moves which are identified by RSI. There are two examples of this phenomena shown in this chart. The first example is period I where RSI made a low but price continued to move lower when RSI values were moving higher. RSI suggested at that time price should not be lower than .8551. Later price moved through and above this level to a RSI and price high of .8583.
The second example occurred when RSI indicated that price should not be higher than .8583, incident to the RSI high value in period II. Thereafter price disobeyed RSI an moved higher while RSI values were falling. Prices moved to far to fast. Like a gap the market will correct these excesses. As predicted by RSI, price corrected down to retest the high .8583, with price low @ .8572.
There is a third example shown in the daily chart. In period I RSI low and price low at 8880. Price moved lower however RSI has moved higher suggesting that price will move up to test the 8880 area. The first resistance level is .8833, established in the third period.
Back to the 30 minute chart. RSI has traced a reverse positive divergence as noted on the chart.
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