Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Euro Dollar - Anatomy Of A Trade Over Three Time Frames. Let Market Information Be Your Best Guide.

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
high mentioned 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. 

Why?

 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