A profitable ‘kiss overshoot’ in EUR/USD
When working with tramlines, the ideal setup is to find at least three highly accurate touch points where the line passes through the precise extremity of the price bars. That is when you can place high reliability on that line to continue to be a line of support (lower tramline) or resistance (upper tramline).
But life isn’t always that obliging. Sometimes, we must deal with non-accurate touch points and that means we need to find the best fit for your suggested tramline.
As I explain in my book Tramline Trading, this task is aided by searching for the other tramline in the pair. If that tramline has three or more accurate (or nearly so) hits, you can place the parallel second tramline with confidence, provided you have at least two decent touch points.
When we have obtained a reliable tramline pair and the market breaks later through one of them , this would normally set up a tradeable event. But sometimes, the breakthrough is rapidly reversed and the market pulls back inside the trading channel again.
This is what I call an “Overshoot”. In it, the market was strong enough to break past the tramline but did not have enough juice to keep going
And when this occurs near the end of a powerful move, it has a great significance that spells PROFIT.
I have been working my main tramlines on the daily EUR/USD chart since last year and with the accurate touch points on both, I consider them highly reliable.
So that when the market began rallying this year off the December lows, my normal expectation was for the market to meet up with the lower tramline in a traditional kiss and then back off in a scalded cat bounce.
And in fact, when the kiss appeared in February, this is precisely what occurred. That kiss was the textbook short trade entry point.
Not only did we get a kiss but that kiss made a slight ‘pigtail’ overshoot during the day.
After the scalded cat bounce had exhausted, the market caught a bid and moved up again and this time, made a series of kisses in April, culminating with the Kiss Overshoot of May 3 (marked on chart).
That overshoot was a severe one and produced a typical spike ending of the rally phase. When that overshoot was made last week, the market dropped like a stone. And that spike overshoot was the signal that the market rally had exhausted.
Adding to the evidence that the trend had changed, there was a momentum divergence at the spike high.
That spike high was just above 1.16 and latest market is 1.14
I have found that these severe overshoots usually herald a rapid retrace of the previous move. It is as if all of the protective buy stops put there by the bears had run out on the way up and the short squeeze had run out.
VIP Traders Club members are currently short EUR/USD