Who knows what impact the ECB quantitative easing announcement will have on markets - big directional movements; wild swings in either direction or not much. These all seem quite plausible outcomes as we head into tonight's announcement. Bigger picture traders using daily or 4 hour charts often adopt an approach of staying out of the initial action. If the horse bolts and they miss out on a large directional movement, well they miss out. There will always be other trades. However, if things settle down and an orderly set up unfolds over a period of hours or even a couple of days, then these events can often produce opportunities. The German 30 chart looks as though it could be useful for this kind of situation
German 30 Weekly Chart
This chart has been controlled by a trend line for around two and a half years. For more than 2 years it defined the uptrend, neatly holding all the minor corrections for a 2 year period from mid-2012. As often happens, once this line was decisively broken it has started to act as resistance.
The market has now run up under this resistance for the third time.
German 30 Daily Chart
Adding to the possible significance of this the zone of resistance around this trend line, this chart also looks a chance of completing a butterfly reversal pattern around current levels or a bit higher.
The butterfly basically consists of a failed abcd correction pattern, where the last "cd" leg sneaks past the previous high. The advantage of this for traders, is that the move into new highs often attracts a lot of new buying, meaning the initial move lower can have strong momentum as recent buyers bail out again.
Ideally, the pattern has Fibonacci symmetry which this one will have if the market peaks not too far above current levels:
- The A to D move will be a 127% expansion of the decline from X back to A and;
- The C to D swing will be 127% of the length of the A to B swing.
A big picture type approach to this situation might be to wait see if the chart to makes a trend peak around this resistance zone i.e daily or 4 hour candles start making both lower highs and lower lows. If it just keeps moving higher past the resistance there is no set up.
A lot of the time it's necessary to wait for a candle to close or move a fair way before you can start to be certain there are going to be lower highs. Until then there's always the risk that price will turn around and the candle will actually make a higher high before it finishes. With this conservative approach if there is a really big and quick move down, well you might miss out on a trade if it's gone too far to make sense from a risk: reward point of view. This is the cost of staying clear of early wild swings surrounding an event. Missing out on profits is less painful than taking cash losses when the market is still swinging wildly.