Let’s consider some subtleties of patterns. In our Facebook group, Nenad shared this pattern, and wrote:
This is a nice breakdown pattern in GBPCHF that occurs in a downtrend. We managed to break below some key levels and now I am watching for the consolidation (2 days consolidation is enough in my opinion). Could look to enter on further meltdown.
So I looked at this, and tried to figure out what I don’t like about the trade. (It’s always important to parse our own biases, and I know that I have not been friends with the USDCHF lately… so I need to be on guard against just not liking any trade that involves the CHF!)
The trade Nenad is suggesting is that a consolidation below a break of support in a range could set up an extended move down. I’ve drawn the range in two different ways—one, with a solid line, showing support broken twice, and another (the box) that shows the range expanded.) Both readings of the chart are valid, in my opinion; the most important thing is to see the range.
I think my dislike of this pattern comes down to two things:
- The weekly chart is “kinda mid-range”, meaning that it doesn’t really show any clear momentum. It’s not a great short setup, and it’s certainly not a long. One of the things that changed the way I saw the market was when I realized, years ago, that you can’t and shouldn’t always have a bias! In this case, I think there’s no directional edge on the weekly.
- The daily chart does indeed show a range, but my issue is that the rally up from the bottom of the range was a bit too strong. (The move up to the arrow.) I would rather have seen a lower high… it’s great it stopped at the top of the range, but it just doesn’t convince me that selling forces are conspiring to make this cross melt down over the next 10-15 bars, even after we return just as quickly to the bottom of the range.
I think if the market had rallied, say, only about halfway through the range rather than all the way to the arrow, it might then have been a better setup, showing lower highs against support and possibly an “inverted cup and handle” type of formation. Another way to think of the pattern is that there’s a bit too much price rejection at the bottom of the range to setup a breakdown.
As another aside, I’d argue the monthly is supportive of a short, but ask yourself if that’s relevant. I would argue that it’s not—a short on the monthly will play out over quarters or years, and we’re talking about a trade on the daily that will be over in a few weeks. If we focus too much on the higher-higher timeframe (i.e., the weekly is the proper HTF to the daily… monthly is so far removed it doesn’t really matter usually), we are likely bringing in a potentially irrelevant bias that can just make us stick with a losing trade longer.
So, in this case, I think the answer is simple: too much momentum off the bottom of the range. At least to my eye, that doesn’t set up the best breakdown.
Come and join us in the Facebook group and learn more about breakout/breakdown patterns this week!