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Measuring Market Activity

Friday 22 February 2013

In the last two Commentaries, Euro Caution, [] and Fiat FRN Nearing Resistance, [], is a tale of
two different moves. There was hardly any retest rally in the Euro, and that in itself was a market message: weakness, so weak that it cannot rally any more. This meant price should decline, which is what

By contrast, the Fiat FRN, [Federal Reserve Note - what almost all call
a "dollar,"] was rallying into a resistance area. The market rallied, but it did not back away from the most immediate potential resistance.
Instead, price lingered and then rallied to the next higher level, against the last failed swing high. Once again, price is not reacting lower.

This does not mean the potential resistance from the last swing high
has failed, for it has not been exceeded, and price still can react
lower. It does tell us to respect the rally, and also not to fade it by
going short, "presuming" the rally may fail. The character of how any
reaction develops will be the market's way of informing us of the
underlying strength or likely weakness.

Just by observing how price was unfolding, developing market activity was telling us one currency was much weaker and likely to go lower,
while the other was not backing off from previous resistance areas, so
the rally sustained itself. The potential resistance in the fiat FRN was
not very strong. Buyers recognized this and persisted, overcoming
weakened sellers.

A third example of benefits from observing developing market activity is the recent failed copper breakout. It appeared poised for much higher
prices. What happened on the day in which the breakout was to occur was exactly the opposite. Whenever a market does a complete
reversal from expectations, it is a very clear message from the market, telling us not to ignore what is going on. No one expected a 20 cent
drop. This also demonstrates the necessity of always using stops, and
that gives rise to another market condition.

Anything can happen! Our analysis was for a strong rally in copper,
while silver and gold were faltering. The fact that copper was holding
so well was construed as relative strength, a good sign. Turns out,
the precious metals weakness was sufficient to reverse the copper
momentum, and we were stopped out. Had we decided to "hang on"
and wait for a price recovery, the results would have been disastrous,
for the market never looked back while in decline.

Very often, market moves can best be explained only in hindsight,
copper is an example. The extent of the unexpected steep drop
seemed to come out of nowhere. The market message, and only
warning, was doing exactly the opposite of expectation. There was
nothing subtle to hint of a sharp drop.

This also goes to another market truism: We can never know how
future price will unfold. Many often make the mistake of presuming
how a market will develop from some point. Impossible. Better to follow the market's lead than to lead the market, hoping it will go your way.
The best example goes to the recent decline in the metals, not just
copper. Gold and silver dropped in a climatic fashion, and it yet remains to determine it a bottom is forming, but few "expected," "anticipated"
the manner in which prices fell.

There is a reason to always be aware of surrounding market activity.