Even before there is environment - one of the most important factors in determining the behavior of a dynamic system such as a person, or an ant colony, or a currency market - there is physics. The 2nd law of thermodynamics tells us that a closed system creates a spontaneous production of order from disorder - a process known as entropy. It's a process that also sounds a lot like market movement. We call this the science behind support and resistance. Markets definitely cycle between being unbalanced and balanced - in fact every time important news is released the cycle starts over. This is all something that makes experienced traders smile, because it's so intuitive. Floor traders and market makers fully understood the tendency of untrained traders to capitulate and exit positions at price peaks and troughs. They understand those price points are often predictable levels based on risk tolerance. But even more fascinating is that these same levels, which imitate growth curves in nature -- think Fibonacci levels-- are also levels price gravitates to in the process of balancing out the previous move, i.e. entropy. And when price becomes unbalanced, that's when we see large moves.
Such a move occurred in EURUSD on Thursday-Friday May 9th and 10th which we see as having long range implications for currency markets. The 1.3050 level was our 10-day Micro level, and had been holding as support for a week --see Figure 1. That particular level was significant to us because as long as it held, the majority of patterns were higher, which meant we were focused on taking long swing and day-trades.
Once price showed it could close below that level, it shifted the majority of patterns to bearish, green-lighting short position, swing, and day trades - see Figure 2.
We see this shift as a sea change bearish move for Euro, and a long-term bullish move for the U.S. Dollar Index. We see the fundamental cause behind the pattern/cycle shift as being that of the U.S. economy being the closest too ending quantitative easing compared primarily to Europe and Japan.
Jay Norris is the author of The Secret to Trading Forex, Futures, and ETFs: Risk Tolerance Threshold Theory. To see Jay highlight trade set-ups and signals in live markets go to: Live Market Analysis