I think readers who use Fibonacci and harmonic analysis will appreciate this post from DV34 outlining the Shark and 5.0 Patterns discovered by Scott Carney in 2011.

DV has spotted potential examples of these in the Dollar Index. Traders could use these to inform their overall thinking in major USD currency pairs like EUR:USD; USD:JPY; GBP:USD and USD:CHF

DX - US Dollar Index – Possible Shark/ 5.0 Patterns

Contributed by regular blog follower "DV34"

I noticed a possible setup on the DX US dollar index and thought I would share it.

I am still waiting for an actual entry signal and for some support to form first, but I thought readers may find it interesting as it is quite an unusual setup and one of a handful I have found personally.

It is Harmonic pattern (Fibonacci cluster pattern) called a ‘Shark’ and another called a 5.0 which is a very close cousin. These are both relatively new Fibonacci cluster patterns discovered in 2011 by Scott Carney.

So for some quick background the two patterns look like this:

The Harmonic ‘Shark’ and ‘5-0’ Patterns

The shark pattern often precedes the 5.0 pattern with one being a buy, and offering a possible ‘stop and potentially reverse’ situation if the trade works and the target is hit.

…Back to the USD index…

During my scans in the weekend I noticed quite a few USD pairs looking extended and running into some form of pretty strong resistance levels, namely Euro, AUD, NZD, GBP, Gold ($1800) and Crude Oil ($100)

Some forming pin bars at or very near key resistance levels. 

On the DX daily chart below, we can see a bearish butterfly in red, the target for this is usually the 161% retracement shown by the dotted red arrow from the peak. 

Interestingly, this butterfly formed right at the start of the rumours and noise about QE3, which was then sold off till the 1st blue circle which was the Aug NFP report - followed a few days later by the FOMC meeting that actually confirmed QE3 was going to happen. Dropping the USD index from 84.00 down to 79.00(ish) a 400 - 500 point move in 5-6 weeks prior to the fact being announced 

Further more, the usual target for the butterfly pattern was hit exactly on the day of the FOMC meeting, which then gapped lower and stopped out any bulls with any stops below the obvious support level in red – right into a demand level slightly lower.

Going back to the real time chart, and looking at it with a different lens on, I have shaded what I think could be a possible ‘Shark’ pattern as noted at the beginning diagrams. 

The reason it differs from other harmonic patterns is that the 3 wave correction actually runs outside of both the 0 and X swing highs and lows, which is frustrating for both longer term breakout trend traders and also range traders as it has taken liquidity out beyond both extremes.

Although right now I am interested in buying this market, I would rather wait until I get some confirmation first purely due to the fact the price is running outside of the 2std dev Bollinger bands and clearly has strong momentum,

My targets would be the two red arrows and if price climbed above the red circle I would lock in a breakeven trade (minimum)

A couple of aiding factors are that the three oscillators/ indicators are oversold and the DTOSC is near crossing which also helps a little but does not confirm – for that, we need price to confirm first… 

Right now for me - that would be either:

a)      a small Doji in the level

b)      a small green bar within or slightly above the level

c)      a Bollinger band ‘W’ reversal off the level 

If any of these possibilities happen then I will be looking at another possible scenario which would be yet another exotic harmonic pattern 

The next pattern I am referring to is called a 5-0, it is a combination of a ‘Shark’ and a reciprocal AB=CD + a 50% retracement of the B-C leg as shown 

The blue arrows show the reciprocal AB=CD lengths they are exactly the same length and coincide perfectly with a 50% retracement of B-C and a fresh supply level that is proven resistance in the past (to the left).

This would be a nice area to look for potential short setups

Again, to gain perspective it is always useful to go to the higher timeframes,

What is interesting to me is that it is clear we have broken a wedge formation with 5 consecutive down weeks, 2 our of 3 indicators are oversold, the weekly EMA’s are at or around our broken trend line and we are very near a weekly demand level that clusters with a 3std deviation Bollinger Band. 

3 STD deviation Bollinger bands supposedly contain 99.7% of all price action, which means to me that the path of least resistance (now that all of the liquidity is already taken) is UP short term. 

Basically, this is a possible weekly mean reversion trade….

Using two different patterns – one to fade back towards MA’s, and another to possibly get short again on a retest of the broken wedge 

Although it is early days and I have yet to find a good entry point, it could be one worth watching in the next week or two… as it will definitely influence most other markets in the very near future 

DV34