The FKLI trade we have been stalking on this blog in the past few posts has evolved several times now. The story began here, with a potential pullback on the daily chart that we obtained a trigger for on the hourly chart.  The initial attempt proved unsuccessful, and we backed up to the next resistance zone to try again, as shown here.

The second trigger required some fiddling, but ultimately went more than 2:1 in distance, thus enabling us to recoup the loss from the first trade. So, this was the trade that was successful.

Decisions then became more complex, because the initial set of two trades then migrated to a higher timeframe. This occurs when the pullback has become sufficiently matured that we no longer consider a lower timeframe an optimal trigger. Entering there makes our trade vulnerable to choppiness. Thus, we migrated the trade to the four-hourly chart.

As of this morning, this third trade in the sequence has failed, as the chart below shows.

July 31st 2018 FKLI Four Hourly Result

By the estimation of most models, the momentum has shifted on this instrument, and it would be a valid decision to shift to being bullish. However, from a larger picture viewpoint, there is still some mild bearishness present, and I wish to use this opportunity to demonstrate how, even if one ends up trading countertrend (in hindsight, we would have been much better off trading to the long side), one can still walk away with little to no damage. Someone trading the three earlier signals would now be left with either a slight loss (less than 1%) or approximately breakeven, if they managed to manage the winning trade spectacularly well.

Taking a stop and reverse decision on this latest move is certainly valid, with the increased momentum to the upside. The weakness of that trade is that it would be quite late in this trend. Thus, I will point out that it exists, but will not participate in it.

The next decision is rather interesting. Assuming we maintain the short bias, we now shift to what is effectively the last line of defence for a bearish view – the daily chart. Picking out the resistance zone for this, systematic though our approach usually is, proved surprisingly tricky. That is because this particular formation of momentum makes one wonder whether price will even be able to reach up to touch the resistance in question, as shown below.

July 31st 2018 FKLI Daily Chart - New Setup.jpg

This trade is now pushed considerably further away in time, as it will take quite awhile for the daily chart to reach the roughly estimated zone at 1797.52-1814.70. I say “roughly” because it is possible that the zone will require some adjustment as price approaches it. This may well not occur for another week or two, or price may turn prior to that. There would now be a valid reason to take a pullback on price on the lower timeframes to the topside. Thus, whilst I still consider the higher level resistance to be stronger, this evidence of bullishness is sufficient to justify lower timeframe upside trades, given strong enough pullbacks, which this market has been surprisingly reluctant to provide.

I will continue to track this trade, because this sequencing of trades shows that in this particular instance, our movements have not been in harmony with the market, and it is educational to see how a series of built-in safeguards can still limit damage.

Good trading!

Kaye Lee
Head Trader Consultant