Recent price action in the Indian Rupee makes an excellent case for highlighting the importance of multiple time-frame analysis. Here’re a few observations from the 1-year daily chart:
• New momentum lows confirming price action which made a steady series of lower lows and lower highs through Jan – May ’14.
• The currency pair fails to follow-through on the downside after breaking down from a 3-week flag pattern
• Recent rally off the June ’14 lows suggests a possible reversal of the existing downtrend.
• The current rally exceeds the size and extent of every previous rally since the inception of the price channel.
• Additionally, momentum kicked off to a multi-month high suggesting a strong bout of short-covering from the multi-year lows of about 58.50.
The beauty of multiple time-frame analysis is that it adds an extra layer of depth and clarity to price action on your primary time-frame. Let’s run through the weekly chart (higher time-frame) to put this rally into the context of a bigger structure:
The major trend on the weekly chart clearly remains weak, and the current rally on the daily chart appears to be nothing but a bounce into resistance at this juncture. It is now clearly evident that the higher time-frame is going through a phase of mean reversion, and that the presence of a decent impulse (as highlighted by the small red arrow) is suggestive of another leg lower.
While price action on the lower time-frames can clearly take strength and precedence to effect a major turnaround on the higher time-frame, it is premature at this juncture to consider the situation close to anything that can effect a major reversal.
To conclude, for all those on the sidelines awaiting a spot to initiate a fresh position, a failure of this rally on the daily chart may offer an excellent opportunity to position yourself in alignment with the trend on the weekly chart, which remains lower.
Till that happens, stay put and remember: Even being in cash is a position!
Happy Trading!
Vipul Ramaiya, CMT
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