Intersecting Lines of Interest

Any technical analysis tool is designed to identify the price level, with the greater probability of representing a future market turning point. Any trend line or indicator used on its own may only produce a 50% rate of accuracy.

However when multiple lines indicate a similar price level and trade theory, then our chances of being accurate may increase dramatically in our favor. For example, we can see based on the following (1-hour) chart, the GBPUSD recently broke down below a common trading range. During these consolidating ranges, traders may adopt a simple buy low, sell high approach. Most recently we can see resistance emerged in the form of a ‘double top’ pattern, which occurred very close to the longer term 50% Fibonacci retracement level. In addition, due to the fact that the overall trend appears to be to the downside, those trading with the trend, may choose to maintain at least a small position in the hopes of greater profits as this trading range turns once again into a trend.

The Stochastic Kiss Pattern

A unique way to utilize the stochastic indicator

Here is a simple technique I devised some years ago and introduced to the institutional market. It takes one of the markets' favored indicators Stochastics and identifies a pattern that when used in conjunction with other analysis can provide great trades.

It is called the "Stochastics Kiss" simply because of the appearance of the fast stochastic line dipping towards the slow line (in a move higher) or blipping higher towards the slow line (in a move lower) and then reversing the next bar.

It looks like this:

The image shows a section of slow stochastics, the blue line being %Fast D and the green line %Slow D. Note that during the strong rise in %SlowD on the left how the %FastD pulls back and then rises again the very next bar. It is effectively showing that price has corrected lower within the range but failed in the decline and caused a reversal back higher.

Equally, on the right we have the opposite. During the strong decline in %SlowD the %FastD pulls back higher and then drops again the very next bar.

These can often provide good trades that can be held for one or two bars at least and occasionally longer.

When looking at this pattern the very best examples are those where the %SlowD maintains the same direction as at Point 1. The %Fast D line moves up towards the %SlowD line and then reverses lower and a sale can be made on close. Note that after two bars profit is taken on close.

Point 2 is not a valid example with the rally higher and reversal in %FastD occurring while %SlowD has no direction. At Point 3 the same thing happens as at Point 2 so should not be used.

However, at Point 4 we see a valid pattern. It is not as clean as the first example since as %FastD dips and reverses higher %SlowD does the same but recovers to be higher again and more importantly higher than two bars prior. Again, a two day trade reaps profit.

What is important with this type of strategy is that price action is also scrutinized. It is important that the price extreme on the single bar move in %FastD does not penetrate a previous swing high or low. Remember the definition of an uptrend is that both highs and lows are moving higher and vice versa in a downtrend.

This most certainly occurs at Point 1 with the sharp correction in price remaining below the previous swing high. Equally, at Point 4 the corrective dip in price remained above the previous swing low and thus the underlying directional move remained intact.

Here is a second example of where this pattern has worked well:

This is the daily chart of the Pound versus the U.S. Dollar where we have seen two good sell signals and one buy signal, all making good profit.

I should add a few instances where it would be wiser to be cautious and possibly not take the trades. There are basically two things to look for:

• Where the Stochastic is either overbought or oversold. These could be considered but will require confirmation from price movement. However, quite frequently because of the extreme reading of the Stochastics there is a higher instance of the pattern breaking down.
• Where the reversal bar that completes the kiss pattern has seen a strong reversal that takes out the extreme of the last two bars then there is a risk of a delay to follow-through. Again any positions taken should be well guarded by a close stop loss.

You may also find that using the support and resistance levels from Pro Commentary, available through Dealbook may also provide guidance towhen to use this pattern.

Using Pivot Levels

Utilizing pivot areas along with your analysis can strengthen support and resistance

Not too many books will discuss the use of pivot levels, mostly the topic being covered as being calculated mathematically through the use of daily highs and lows. However, the is an alternative way of looking at pivot levels which, albeit subjective, can provide excellent trading opportunities.

Many years ago the concept of using prior support and resistance levels as pivotal areas became clearer to me after a discussion with a trader who had scant interest in technical analysis. I had just gone through the usual daily analysis and provided my report to the traders. For a moment I chatted within one trader who declared that he agreed with one of my resistance levels.

Now being dedicated to technical analysis I was rather intrigued how a trader who didn't pay any real attention to technicals could agree with a resistance level so I asked him how he arrived at that level also. His reply opened up an explanation to me on why these techniques often provide good trading opportunities.

His response was that when he was trading the same currency several weeks before he kept using this level as support and made profits on several occasions until price finally dipped below that support. He concluded that it would provide the same effect on the way up again.

Effectively, what he was describing was traders' memories, these being determined by the emotions of having made or lost money. Thus pivot levels represent emotions, the fundamental basis of technical analysis.

So how will these look?

It is quiet clear that in this 4-hour chart of the Euro against the US Dollar that price has been moving in each direction in steps, stalling in the general area of the previous major support or resistance. For example, the Euro rallied from the bottom left of the chart to bounce from the same level as the prior two troughs. Very simply this represents the basic theory that support remains as support until broken and once broken will provide resistance (and vice versa.)

Following the breach of the two prior lows price rallied and sees a correction. We cannot determine from this chart whether this was at a previous support level. However, the rally continues quite sharply and then corrects lower.

It then retraces back to a previous resistance level following which it reverses lower once again, breaking the previous corrective low and stalls in the area of the first price peak in the rally. In the subsequent rally it initially bounces from the first trough on the way down.

It will be useful to have these levels match with overbought/oversold levels in momentum studies and hopefully, in shorter time-frame charts, to displays bullish or bearish divergences at these pivot levels. If this occurs it provides a stronger signal for a bounce.

At times it is possible to use pivot levels and pivot lines. The latter occur when price oscillates around a line that is not horizontal but more like a trend line only there is no trend:

This is the daily chart of the British Pound against the Japanese Yen. Note how the price point ringed in black occurred when testing both a pivot support area and a pivot line support. These can be particularly effective in cross markets when used with charts constructed by a line on close.

Thus, do take note of these pivot levels as when companied with Fibonacci retracements or projections they can provide you with excellent trading opportunities.