Wednesday Evening 14 July 2010
We saw an opportunity to take a long position in the Euro, based on a strong volume rally followed by a retest decline on less volume. The retest on
less volume indicates there is no selling pressure, and that is a positive sign for
a potential rally to follow. You can see the strong rally bar, second bar after the
low on the 13th. That wide range up bar was followed by two small range bars
that did not retrace much of the rally off the low. That sparked our attention.
In a market that is in a rally mode, corrections usually last 1 to 3 bars. This
one was only two bars, a positive sign for the upside.
Note how the volume dropped sharply on that two bar decline. This says that
there are few sellers at that point. On the first sign of a turnaround, we wanted
to get long, and we did buy at 125.77 on the very next bar. That will be covered
in the second chart.
What is interesting is how one can read present tense developing market activity
to make a decision. When price made a high around the 127.50 area, back on
the 9th, you can see how the market then corrected, all the way down to the low
which caught out attention.
After establishing a long position, the question then becomes, where to exit?
We were still long after the rally took price back to the 127.57 high, where a
lateral consolidation developed at an area of resistance. Take profits or not?
Not!
We were aware that the market was consolidating, not correcting. What is the
difference? In a consolidation, there is very little price retracement, and that is
an indication of underlying market strength. See how shallow the correction is in
a consolidation phase? On the decline from the 9th, price retraced about 225
pips. By contrast, in the consolidation, price corrected only 50 pips, so we
expected there was more upside to be realized.
Then, what developed was a clear message from the market. Price dropped
under the consolidation to a low of 126.82. Could this be the start of a larger
correction? Using a 60 minute time frame, we had to wait to see where the 60
minute bar closed. A weak close would get us out. By the close of the last
60 minute bar on the chart, we had our answer. The close was on the upper end
of the range, and that tells us buyers were in control. Adding to that observation
was the increased volume. The increase told us that buyers were entering on
price declines, supporting the market.
We had our answer from developing market activity. It was saying that the rally
was likely to continue higher and to hang onto remaining long positions. There
is no better source of market information than that which is generated by the
market itself, in the form of price and volume. What is significant about price
and volume is that they are proven facts. Anything and everything else is just
potential.
The next chart shows how the market advertised higher prices.
A long position was established at 125.77, anticipating a rally. Half the position
was liquidated at 126.30. At the time, the 126.50 area was resistance, and on a
30 minute bar, [not shown], there was a surge in volume. It looked like potential
stopping action at resistance, hence the exit. Plus, making 53 pips in a short span
of time was great, given how price had dropped steadily from the 9th.
By keeping a long position, the rally that followed was a very pleasant surprise.
You can now see that the “read” of the failed probe did lead to higher prices. Not
shown on a 60 minute chart, we knew there was an oversold condition starting
around 127.74 to just above 128.00 on both the daily and weekly charts, and that
could act as resistance. We entered an order to sell at 127.85, if the rally were to
continue, and placed a protective sell stop at 127.20 should price reverse. Getting
stopped out on any reversal to that price guaranteed a profitable trade.
Price did rally higher to 127.79, and when that happened, the protective stop
was raised again to 127.52. A short while later, the remaining long position was
stopped out for a 175 pip gain. Adding the 53 pip gain from the first half of the
long position, and the trade netted $2,600.
The entire trade can be attributed to reading developing present tense market
activity and letting it tell a story. As it is apparent, the market “tells” very
compelling stories. They all are not this easy to read, not that this was “easy,”
but relying on the trend and reading developing market activity gives a much
greater probability of being on the right side of any given trade and minimizing
risk exposure when a trade does not work out as anticipated.
