We recently saw the currency pair EURUSD, Euro Dollar, test resistance around 1.51, break above the resistance, then fail. As if often the case this failed test led to a decline. Price has now fallen from the upper Bollinger band to the lower Bollinger band, and remains in a trading range between around 1.47 and 1.515.

The powerful up trend we saw earlier in the year has been halted for the time being, and for us to consider it resumed price will need to break decisively above the 1.51 resistance.

For some while it looked like the currency pair USDJPY (Dollar Yen) was attempting to base, after being in a down trend for much of the period since April 2009.

Technical analysis reasons to think this might be the case included a hammer which formed on 28 September, and which was then successfully tested on 7 October (the hammer appeared to be acting as support as the bears were unable to push prices significantly below the bottom of the hammer). This potential support level was at around 88.

The basing scenario was thrown out of the window last week however, as the currency pair took a violent lurch downwards on 25 and 26 November, dramatically ripping through the 88 level and at one point getting below 85.

The down trend is firmly back in force, and has been reflected in the ADX readings which on the standard 14 day setting rose back above 25 (and rising) with -DI above +DI.

I commented a week ago that the currency pair Euro Dollar had moved firmly into up trend mode, using the ADX tool. Since then the currency pair has pulled back, closing on October 30 just above 1.47, having closed the previous week just above 1.50. This knocked the 14 day ADX level down to 23, and also caused -DI to rise above +DI, in other words the ADX tool is no longer registering an up trend for the currency pair.

This does not mean the up trend cannot reassert itself again. However, for that to happen we will need to see price rise above the recent high just above 1.50

In early April 2009 the currency pair Dollar Yen reached a high of 101.47. From then to early October a powerful down trend emerged, with a low achieved on October 7 of 87.98. Since then we have seen a rally to 92.33 on October 27, followed by a fall back below 90.00 again.

There are a number of possible indications that after the six month powerful down trend the currency pair may be beginning some kind of basing action, and that the October 7 low may act as some kind of as support.

1) on September 28 a one bar candle pattern known as a hammer formed, which has predictive value after a down trend; the hammer consists of a small real body (the difference between the open and the close) located near the top of the range of the day, combined with a large wick or tail (the difference between the bottom of the real body and the low of the day). Psychologically, when a hammer occurs, during the day the bears initially completely overpower the bulls, but then later during the day run out of power, and the bulls manage to push prices right up from the low to near the open and near the high of the day. Traditionally, the low of a hammer offers support. The low of this hammer was 88.22
2) after the hammer formed price rose, then fell again to test the low of the hammer; this was a successful test from the point of view of the bulls, and created the previously mentioned low of October 7
3) the combination of the low of the hammer and the low of October 7 produced a miniature double bottom, which again has the potential to offer support.

Recent price action in the currency pair has now caused the 14 day ADX indicator to fall below 25, reflecting an at least temporary reduction in the power of the down trend.

I looked at Sterling Dollar last week. The background is that the currency pair was in a trading range from early June to late September, between about 1.60 and 1.68. It had an unsuccessful break out above the top of the range in early August, and then in late September it broke down below 1.60, giving the break out players great hopes of a new down trend.

My comment last week was really that there had been no follow through from that break below 1.60, and the price action looked indecisive. The longer price was hovering just below 1.60, and not getting pushing lower, the more the bears were getting restless. The temptation for the shorter term players is to cover the shorts and go look for more promissing opportunities elsewhere.

On Thursday of last week, 15th October, the currency pair had a big up day, closing above 1.63, right back in the "box" of that May - September trading range.

That is the end of attempted break below 1.60, at least for now. We are back in a sideways market.

I tend to consult the ADX indicator to get an overview of the key trading instruments monitored at this site. ADX has many virtues as a technical analysis tool, however because it uses moving averages, by definition it is a lagging indicator. This is one of the reasons why I like to look not only at the standard 14 period setting, but also a faster reacting 8 period setting.

So, a little slow off the mark, the 14 period ADX is now showing the currency pair Euro / dollar (EURUSD) as being in an up trend. ADX has reached 26, and is rising, with +DI above -DI. The faster moving 8 period ADX is at 33, however that has fallen slightly following a three day pullback in the price at the end of last week.

This new up trend was initiated (as is often the case) following a break out above a trading range, which itself formed after an earlier push upwards.

New Concepts in Technical Trading Systems (Trend Research, 1978).

In this book he uses a 14 period ADX, and refers to a number of important signals. One of these signals is the turn down of the ADX line from a high level, an early warning sign of a potential end of the trend.

Since the book was published a number of other analysts have also looked at this signal, and one possible practical interpretation is this:
1) if the ADX line turns down having risen above the two DI lines, and is at a high level, this is a warning sign that the trend may be ending
2) this may just mean that the trend is going to halt temporarily, and then renew itself; or the trend may be finishing for good
3) there may be a test of the most recent high / low
4) stop placement needs review, and it could be a good time to exit at least part of a position.

The reason for mentioning this research right now is the action of the currency pair Dollar Yen, which is one of the seven instruments we follow in our ADX snapshots. From late August to late October the instrument declined from near 110 Yen per dollar to around 90, and the 14 day ADX peaked at 49 on 27 October, turning down subsequently. This proved to be just a temporary halt in the decline, the downtrend renewed, and a new low was made on 17th December around 87 Yen per dollar, with ADX peaking on 22nd December at 50. Some would argue that a higher ADX peak (50 versus 49) shows the downtrend still has life; others would now reckon that this second turn down in the ADX indicator has significance and that a successful test of the most recent low will set up a potential base for a recovery.