Good Evening Traders and Investors,

It is a chilly -4 in Park City with a few more days of on again/off again snow storms. I will be sure to let you know how it schusses when I chime in tomorrow evening.

We have some very interesting charts to look at this evening – bringing into focus a key technical pattern that occurs often.  Once you recognize it, you can use over and over and over and you can even use it in:

  • indices
  • etf’s

You can also use it in various time frames as you will see tonight.

What pattern am I talking about?  It really isn’t so much a pattern as a formation.  Let’s go to the charts:

GBP120809

Look how the lows today were finally broken and we traded below the 0.00 line around 1.6275.  What happened once we broke through? We retraced and came back up to the old support level of, you guessed it, 1.6275.  We used it as RESISTANCE!

Old support becomes new resistance.

Now, let’s look at chart 2:

GBPDaily

We know the relationship between the dollar and the equity markets.  If the equity markets continue to break, look for the GBP to break its suppot at 1.6250 and then use it as resistance like we saw in Chart 1.

How do we trade this?  Easy, as we hae a few options:

  1. Trade short into it – the “expectant” trade – I recommend this least of all, but for all of you antsy pants out there,e my guest.
  2. Trade as it breaks it and use momentum to carry the GBP lower
  3. Trade the “second chance” – in my opinion the best risk to reward trade of the three

As in chart 1, we broke support and then came right back to that level.  If you are patient, you can wait for the retest of the old support level and get in as close to that level as possible.  This way you have your risk built in -if it comes back above that level, you exit with a small loss.  If it “touches it and kisses it good bye” you have a super risk to reward trade.

The same works for old resistance becomes new support.

Going into tomrrow, I wouldn’t be surprised to see the strong equity market bounce, but then again I wouldn’t be surprised to se a strong equity market breathe a little more to the downside.  Either way, we have some plays to look for that provide a nice risk to reward and a well thought out trading plan.

Happy Trading and Be Environmentally Cool

Brian