Example 2: Euro vs dollar

Now lets look at an example where the market is possibly set to reverse - the Euro against the US dollar.

Pushing up into the cloud for the first time since September.

Analysis

With the exception of a rather dramatic three days in early September, the Cloud has limited rallies most of the time. The Cloud itself was relatively flat in November because the highest price of the last 52 days was the early September high.
Note also that the Cloud has been relatively fat throughout, but has narrowed starting 10 January. Kijun-sen (26-day MA) has flattened suddenly, having dropped very steadily for a long time.
The moving averages themselves have crossed, caused by the strong rally of the 10 December, and are now approaching the bottom of the Cloud which should act as resistance.
Added to the last two days of consecutive candles with long upper shadows in the middle of the Cloud, this hints that we are unlikely to break higher short term, but we will watch in February for a potential uptrend to develop.
In the process Chikou-Span burst higher through the long black candle of the 4 November. It has also broken above both moving averages of 26 days ago and, rather than resistance, these may start providing support. The candles of 26 days ago are some way below Chikou-Span, so if the Euro were to slip it could fall quite a long way, but in seven days time these should begin to act as support levels.

Summary

The analysis suggests that the Cloud will therefore limit the upside for another week at least and maybe longer, but there are many elements here suggesting that the longer term picture is setting up for a reversal. I would be watching for more signs that confirm this over the coming month.

This concludes the first and most basic part of this book. Most traders stop here and are happy to limit their analysis to the Clouds and major lines. This is also the case in Japan and is what your average Japanese trader will be watching. In fact, I do too. Then I move back to my more conventionalWestern methods, which I describe in the next chapter for those of you who are interested.