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Canadian Dollar - Bernard Baruch: "Buy Straw Hats In January."

Thursday 4 July 2013

The volume activity recently caught our eye in the Canadian dollar and prompted a closer look. Our position is that by following the
developing market activity, across a series of time frames, a story
about a potential trade should emerge. What follows are our rough
draft charts, without comments on them, beyond a few initial
observations, going from one time frame to another. All that matters
is the conclusion drawn from them.

Trend is always of primary consideration, and the daily seems to
be at cross-purposes for positioning in harmony with the trend.
Acknowledged and considered.

Had a 15 or 25 year span been chosen for the monthly chart, it would
be clearer that this higher time frame is up. There is currently a
sideways Trading Range, [TR], in progress, but note that it is well
above a 50% retracement of the 2007 high to 2009 low range. A
half-way retracement is a more general observation. When a
correction holds above it, it is viewed as overall strength.

Red volume bars indicate when price closes lower than the previous
one. The volume for June was the highest "down" volume in over a
year, while at the same time, price is declining into an area of support
from mid-2010 lows.

It is too soon to know if there will be downside follow-through, for July has just begun. For that possible answer, we look at the lower time
frames.

CDU M Review 4 Jul 13

We are calling the weekly trend a non-trend, a TR within a larger up
trend. At present, price has declined to the lower area of the TR,
which should act as support. When we look at the increased volume
lower as price is declining, a closer inspection shows the last down
volume bar, second from right, was greater than the previous week's
down volume, third bar from right.

The contrast between the two is stark. The 3rd bar from right clearly shows downward ease of movement, and on the lowest volume in
several weeks. We attribute that to a lack of demand with sellers in
control.

The next bar down, 2nd from the end, has a stronger increase in
volume, but the range of the bar was about one-third the size of the
previous one, and price was right at important TR support. This bar
tells us that buyers stepped in and stopped the effort of sellers cold.
The increased selling effort did not result in a move lower. This price
area is being defended, and the increased volume is from "smart
money," buying whatever weak-handed sellers and stops are offering.

Smart money buys low and sells high. Weak hands and speculators are always on the other side. It is not an accident that the character
of developing market activity turned more positive at a point where
support would be expected to hold. It is usually a smaller risk
consideration to buy within the lower 25% of a TR.

Also, notice the time factor from the May 2012 low and rally to the
September 2012 high, 14 weeks. Since that swing high, it has taken
42 weeks for price to reach the current swing low, if the current low
holds. Price declines faster in a down market than rallies. We see
the opposite within this developing TR. This leads us to conclude that
it is accumulation in preparation to go higher. We can always be
wrong, but the risk/reward consideration, while price is at obvious
support, is favorable.

CDE W Review 4 Jul

The two dark horizontal lines at the bottom are support from the
weekly chart. What stands out on the daily, and in support of the two higher time frames just discussed, is the highest level of selling activity volume comes at the lows of the decline. If it were smart money
selling, the volume would have been greater higher up, for smart
money does not sell into/at support. The risk/reward does not make
sense, at that level.

[This is the Sep contract, so volume from mid-June and earlier would
have shown up on the June contract.]

Also worth noting is how price has since moved sideways and not
lower, in response to the increased level of selling activity. A look at
the composition of the current trading range confirmed the logic of the developing "story," up to today's activity.

CDU D Review 4 Jul 13

Professional forex traders use a 240 minute chart, primarily because it
is a global market, and that time frame is more inclusive. High volume activity always bears watching to see what message market
participants are sending.

The first four highest volume bars, [arrows], show closes lower than
the previous bar, usually a form of selling, otherwise, the close would
be higher. Look at where the closes are located for each of those
"selling" bars: upper end to mid-range. On the highest volume activity
for this lower-end developing TR, the close was mid-range, or a draw
between buyers and sellers.

When price is at recent lows, who do you expect is in charge?
Sellers. When the highest volume effort produces a draw, can it be
said sellers are in control? Absolutely not. It as the effort from buyers that prevented sellers moving price lower, so from that point of view,
it was more than a draw for buyers.

The last arrow down bar shows ease of movement lower, and in fact,
price breaks the TR support from recent lows. Two things happen:
1. volume declined, which is a sign of less selling pressure, and 2. zero
downside follow-though. Seven bars later, we see a rally on
increased volume that erases the downside volume at the low.

Following the logic of developing market activity over four different
time frames, each had a "story" to tell that gave credence to the next
lower one, and the conclusion we draw is that price is undergoing
accumulation, specifically at the lower support of the developing TR.
If that turns out to be true, it makes sense to be long.

Hence, the buy recommendation today at 95.00. Stop at 94.22. From this point, we need to see future developing market activity to confirm this analysis. We could be timely; we could be early. There may still
be another test lower, for anything can happen.

There is no question that buying within an established up trend is
preferred and so much "easier." Bernard Baruch once said, "You make
money buying straw hats in January, [when nobody wants them."].

CDU 240m Review 4 Jul 13