Thursday  5 November 2009

 Not for the first time, and not the last time do we mention the importance on
knowing the trend, particularly in the time frame you are trading.  This simple
first step helps to put the market, and your chosen trade, into a context.  Here
is how we look at a market to determine if there is a trade potential, and in
which direction.

Always be aware of the monthly chart for it is more controlling than the lesser
time frames.  It is not a timing tool, but it keeps one mindful of the most
important trend.  For the Euro$, the monthly trend is up, however, October
closed just under mid-range of the bar, indicating sellers at the highs. 

This needs to be qualified to fit the market signs.  While sellers at the high
are apparent, the October bar, second from the end, also made a higher high,
a higher low, and a higher close.   These are positive signs and to be expected
in an uptrend.  That makes the poor monthly close just a red flag, a note of
caution. Because the monthly time frame is more controlling, it is worth watching
as the smaller time frames rally and retest the October high and see HOW the
market responds. 

The expectation, given the trend, is for higher.  The red flag observation
prepares one to be more alert as to the quality of any rally from the weekly and
daily time frames.

We also referenced the previous poor closes from April and July of 2008 to give
an idea of how much stronger higher time frames are when trend changes occur.

 EUZ M 5 Nov 09

Switching to the weekly chart amplifies more clearly the message from the
monthly.  The high was a small range bar, third from the end, and volume
increased.  The relatively smaller bar on increased volume tells us that sellers
were more active.  The high-end close says buyers are still in control.  The
next week, instead of continuing higher, the weekly turned lower on a wider
range bar and increased volume.  The purpose of mentioning increased sellers
from last week, as the range was unable to extend higher, now becomes more
relevant for the lower bar that followed.

Initially, the wide range down on increased volume looks bearish…not trend
changing, but a shot across the bow for the bulls.  Just as there was no upside
follow-through for the high of three weeks ago, there was also no downside
follow-through as a result of the negative week, second bar from the end.

So far, the current week is back in a rally mode, in line with the trend.  The
volume is as of Thursday morning, so it is not yet complete.  What we want to
see is how far price can rally against the large down bar, to judge the quality
and strength, and if there is any.

We should note that the weekly chart is clearly in an uptrend, so the edge
goes to buyers and the onus for change, if any, is on sellers.

EUZ W 5 Nov 09 

Once again, the detail is clearer from what was observed on the monthly and
weekly charts.  On the Daily, the high was a small range, but the bar closed
lower than the opening and lower than the previous day.  The next day’s sell-off
bar stands out as greater in impact, erasing the previous eight day’s gains in a
single bar.

It is the daily activity which followed  that attracted attention because we noted
the increased volume from 27 October on, for a five day period of time. 
Volume increased, but price stopped going down.  Note how the bars from the
end of October are overlapping, a sign of a struggle between buyers and sellers. 
Then came the third bar from the end.  After all the increased volume on the
way down, that then stopped, a probe lower failed to uncover more selling, and
price closed above the lows of the last four trading days.  The volume on the
probe increased, telling us that buyers stepped in and reasserted control.  [The
opposite, in a smaller way to the highmentione with increased volume.]

Just when continued weakness seemed like a lock, the context of the trend from
the higher time frames came into play and supported the smaller daily effort. 
An awareness of the higher time frames help to keep a “bearish” stance in
check.  Even the daily trend remains up, and that is confirmed by what is now
a higher swing low, relative to the last swing low of 2 October.

As noted on the chart, this is where things get interesting for the Euro. 
Yesterday’s bar, second from the end, rallied with ease of movement up, closed
strongly, and volume was in keeping with recent activity.  The cogent question is,
will the red flag from the monthly be controlling, or will the existing trend prevail,
as it has been?

So far, as we wrtite, late Thursday morning, price is moving sideways as it
approaches the area we started with on the monthly chart.  The different time
frames are inter-related, and this is how one can take advantage of the market-
generated information. 

Buy or Sell?

That answer will come from reading the lower time frames as a trigger for entry,
depending upon how one reads the present tense market activity.  Because of
the trend, the edge remains with the bulls.  As to initiating a new trade, market
activity is now in the middle of all three time frames considered, and it is in the
middle where the level of knowledge is least…a flip of a coin.  As we look at the
intra day charts, the picture is not any clearer, and that, in itself is a red flag. 


 The trends are up in three time frames, a red flag has been noted, but
present tense market activity is not exhibiting clear strength when it should be. 
The vote would be for no trade, and wait, instead, for a retest of the failed
probe lower from three days ago, or a failed retest rally against the October
highs.  Others may see it differently, but we maintain specific requirements of
present tense market activity, related to the past, and for now, a coin toss offers
no edge.

EUZ D 5 Nov 09