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FXS-PIVOT CLOUD

Doug Schaff

FX-Strategy

http://www.fx-strategy.com

When used correctly, pivot support and resistance are very powerful tools to recognize potential stopping or stalling areas for price movement. In general they are used quite effectively in consolidating markets although when used in conjunction with forecasting techniques such as Elliott Wave they can provide targets in trends also. However, just as the concept of support and resistance can be applied in trends through trend lines, the concept of dynamic pivot levels can also be utilized.

FXS-Pivot Cloud provides a shaded cloud-like display on a chart that acts as support or resistance in any market, dynamically updating as a guide to distinguish breaks and reversals.

The chart above displays daily EURUSD history as it broke higher into a strong uptrend in the middle of 2002 at point A. Note how after initially trading within the bounds of the cloud at the extreme left of the chart, price breaks higher, even the day's low clears the Cloud High, indicating a strong rally. Only at one point did price then breach the Cloud Low, and even then the close failed to penetrate it. The cloud continued to rise along with trend. At one point price bounced from the low, and eventually crossed below towards the center right of the chart at point B.

It can be seen that the FXS-Pivot Cloud acts as an effective trailing stop loss in trending markets.

Following this strong trend, price consolidated in quite a tight range. The majority of time price failed to penetrate the cloud on close (exceptions being at point B and point C).

We must also consider the longer timeframe.

The second chart displays exactly the same period of price action on the weekly chart. Note how price broke above the weekly cloud high at point A to confirm the daily break higher. At point B on the daily chart, where the price high dipped below the daily pivot cloud, it had not even broken below the weekly cloud high and thus the daily signal would have been viewed with some caution.

By point C on the daily chart, price penetrated both cloud high and cloud low. However, when seen in conjunction with the weekly chart it can be seen that the weekly cloud low was continuing to provide support during the consolidation. The break higher on the daily chart around point C was not confirmed by price low breaking above the weekly cloud.

The same concept may be utilized in different time frames. The chart shown above is the 4-hourly chart of USDCHF. Following a consolidation on the left of the chart, a break lower is seen. After this break price declined to the 1.3230-50 area and moved sideways but without cleanly penetrating either top or bottom of the cloud.

By viewing this also in the daily charts we can begin to achieve a bias to price direction and extent of move.

From this larger perspective it can be seen that the market was consolidating on a daily basis and the break lower here occurred at the same time as the 4-hourly break lower. Towards the 1.3230-50 level we can see the daily cloud declining but with price beginning to consolidate, evident from the 4-hourly chart. It would appear likely that any test higher will encounter resistance in the area of the daily cloud.

Of course, it is possible (and recommended) to view the same chart on lower time frames to judge the shorter term price movement within the analysis suggested by the 4-hourly and daily charts.