In my opinion ‘the longer they consolidate, the further they run’ is a golden rule when it comes to consolidations. It applies both to forex trading, commodities as well as stocks. I will show a couple of examples later in this post but first of all I will cover USDJPY, a currency pair that recently broke out of a 8-week holding pattern with an explosive run of more than 100 pips overnight.
Break Out Many Boxes
B O M B for short, I have a simple way to detect consolidations. I use a feature called ‘period separator‘ on MT4 together with a drawing tool to segment price charts into periodic segments. In the case of USDJPY, it was showing 8-weeks of sideway consolidation or boxes.
This is the latest chart of USDJPY showing 8 weeks of consolidation or price action that is mostly sideways. After the break of downward trend line and a common horizontal resistance, price move was explosive.
USDJPY daily chart with horizontal resistance and trend line
In fact with those boxes, I was able to know in advance that USDJPY was brewing something because that consolidation jumped out visually. All a trader has to do is to keep that setup in mind and be on the lookout. Catching the right timing is crucial but something achievable to most.
This chart was posted on 13 May in our members-only section
3. When USD rally returns, there is a potential for this pair to rally further.
4. Overhead resistance consists of previous 4-month highs as well as 121 round number and psychological level.
5. What about ’1 YL’ and ’2 YL’? These are also resistance but imo by the time price approaches these levels, the market will understand that USDJPY is going to breakout and things will move pretty quickly.
6. Support is provided by the low of April in the 118 region.
7. At this point, one potential support is provided by green and red trend line.
8. This is a link to a big monthly time frame chart that shows clear skies over 121-122.
Note “When USD rally returns, there is a potential for this pair to rally further” and “Overhead resistance consists of previous 4-month highs as well as 121 round number”. Those of you who are sharp should have realised that DXY bottomed 2 days ago.
Included were two are very important messages.
“When USD rally returns, there is a potential for this pair to rally further”
First of all, DXY bottomed 2 days ago making in this USDJPY move something that goes hand in hand.
DXY bottomed 2 days ago and rallied big yesterday
“Overhead resistance consists of previous 4-month highs as well as 121 round number”
Secondly, we can see USDJPY price action at 121 at this moment.
USDJPY 4-hourly chart
‘OK I got you. What next?’
USDJPY movement may not may not be over since it has a number of resistance to fight including the next one at 122. However traders should also take note that 8-weeks of consolidation is peanuts compared to the big holding pattern it has printed since months.
USDJPY weekly chart
My message is very simple. I won’t know what the outcome is since I can’t read the future but I can tell that history repeats sometimes so traders should not take their eyes off this pair in case there is a break of resistance and subsequent movement. [Note: This is not an encouragement to trade. I write these for learning purpose for members of this community. Each person takes responsibility for his own action.]
Notable long consolidations to keep in mind
This index famously consolidated for 6 years and then doubled in 6 months.
Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
Soh's Twitter account @sohtionghum was ranked #23 out of The Top 70 Twitter Accounts To Follow In 2015 by MahiFX.
"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."