While I had been on vacation for the last few weeks I did manage to keep an eye on market developments. For example, I knew the bull-run in stocks was still unimpeded by, #1 how shallow the August correction was -- which supports the long-term bull pattern -- and #2, by how many prominent analysts continued to argue with its ascent. Even the younger analysts have climbed aboard the bear band wagon with their frightening charts and graphs - "the figures don't lie you know." Yet in all fairness, even mainstream news sites are bombarding readers with stories of impending gloom and doom. Luckily, over the decades I have seen firsthand the benefits of whistling by the graveyard. I'm reminded of a quote from the classic, Reminiscences of a Stock Operator: "They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side." That is the truth in stocks, currencies and commodities. Your position is either profitable or not and no amount of research fueled opinion is going to change that.
While the volume and volatility may be greater now than in years past, nothing has really changed in market movement over the last 30 years, nor will it likely in our lifetime. I read in a science journal once how it would take thousands of years to change human nature. I found comfort in that. Something else I find comfort in is how markets are affected by lower volume, such as we've seen over the past month -- today notwithstanding. The low volume spelled a breakdown in correlations, but price patterns -- the backbone of how we approach market analysis -- remained constant. Low volume means smaller ranges, but the height, or depth of the retracements of the intraday moves -- the intraday price patterns themselves -- remained the same as those we see in larger moves on heavier volume. Momentum, a measurement associated with market price movement which I often take for granted, also remained constant. The MACD, a momentum measuring indicator either supported signals or it did not. In Figure 1, an intraday snapshot of the EURUSD from the end of August, and one of the slowest times of the trading year, we see trade signals occurring at predictable retracement levels. Retracements are the hallmark of price pattern as they create the higher lows, or lower highs which determine whether a market is in a bear stage or bull stage. The patterns on the different time frames create the fractals which price builds on. Figure 1 demonstrates the fractal nature of markets as the euro cycles thru a higher time frame bull phases and lower time frame bear phases.
Figure 1. Fractal Patterns on Intraday Euro Chart
At the same time as this intraday snapshot, the euro was in a bull phase on the daily chart, while the Australian dollar was in a bear phase -- see Figure 2.
Figure 2. AUDUSD & EURUSD Moving Counter to Each Other
If two pairs share the same counter currency -- as AUDUSD and EURUSD do -- and one is in a bull phase, while the other is in a bear phase, on as influential a time frame as the daily, yet volume is low and we are in a slower time of the year such as the dog days of summer, or the end of the year holidays, then we need to know that in the big picture we are experiencing a counter-trend phase. Correlations, which we use to determine if we'll see follow thru on a move - i.e.: trending or counter-trending behavior -- are helpful in identifying the market environment we are in, but not nearly as influential to trade selection as price pattern, direction and momentum. Simplified: lower volume leads to counter-trending price action with a break-down of market correlations, while greater trader participation rates, i.e.: higher volume, means trending price action and tightening of market correlations. From a traders perspective you need to enter and exit trades quicker in a counter-trending environment such as we saw in August, while in a trending environment, such as we see now, hold trades longer.
What all this means going forward is that as volume picks up the further we get into September the impulsive price movement we saw today is likely to continue. While we can't rule out a retest of 1.02 or even lower in the AUDUSD, a retest we would look forward too, the Aussie pairs are definitely back in play on the upside. We are definitely interested in scouting buy set-ups and signals in these pairs at lower prices. One exception to the volume surge on Thursday would be the USDJPY. It may be just a little early for an upside breakout for USDJPY though every new high in the U.S. stock market works toward drawing out the powerful Japanese investment class back into global investment markets which would be yen bearish - Japanese investors would sell yen to invest in overseas markets and projects. We also like the pound thru year end, but need to see a correction lower first. As for the euro, it's a short squeeze on longer-term traders with short-term longs very likely to exit quickly; in other words it's just another bear market rally. And for stocks, our views have not changed all summer since writing: Stocks Poised for Multi-Year Rally, back on July 1.