Shooting Star and Divergence at the Top DATR on Cable

For today’s price action study, I’ll review a setup I like to call the “Trifecta.” Basically, it’s a candle pattern and divergence forming at an inflection point, and when you see this bad boy, it’s a good signal of a potential reversal. Check it out!

Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary day trading blog here.

Before we go onto the chart, let’s take a quick look at the Forex calendar for today’s market moving events.

There wasn’t really anything major in the pipeline today, but we did get a couple of second tier events bringing on some volatility. First was the UK Construction PMI coming in better than expected (53.7 vs. 49.5 forecast), sparking speculation the Bank of England will be able to raise rates, giving Cable a boost. Later in the session, the ADP employment survey also came in better-than-expected (187K vs. 140K forecast), but last months number was revised down to 297K. As we can see in the chart below, it didn’t have much of an affect on GBP/USD.

Also, we saw a slight return to risk aversion during the morning US session as the turmoil in Egypt turns violent. Murbarak supporters clash with anti-government protesters–over 600 people are injured and at least 3 people are killed.

So, after a strong risk rally yesterday, the markets were a bit more mixed on positive data and geopolitical issues. Range plays anyone?

GBP/USD 15m

PCDPOD20110202.png

Technically, I wanted to focus today’s price action study on the turn signal I like to call the “Trifecta.” As mentioned earlier, it consists of a candle reversal pattern and divergence at an inflection level. Today, we saw a shooting star (reversal candle) at the top DATR and divergence. This signal turned out to be a winner as the pair found a top there and proceed to fall from there. And for you US session traders, there was another chance to jump at that level (which I called out on my Twitter page) before the pair eventually moved back to the day open price of 1.6149.

Today’s Takeaway

Today was a range bound kinda day as the calendar lacked of major events. But positive tier two data clashing with a shift in geopolitical sentiment did bring a little bit of volatility. Also, one thing I’ve noticed is that after strong momentum days like yesterday, the market tends to chill out the follow day (like today).

On days like this, be sure to watch the top and bottom of the daily average true range for potential support or resistance levels, and if you see a divergence signal AND candle reversal pattern (aka the “Trifecta”), it might be time for the market to take a turn.

Thanks for checking out my review and stay tuned for more. Sign up above for our Twitter, Facebook, or my email updates to be notified of my “Pick of the Day” right away or check out my Twitter page as I like to call out levels to watch during the Euro/US session overlap! Good luck and good trading!

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