A sideways pattern of trade that is caused by the distribution, or selling, of an asset before a reversal of the recent move occurs, looks to be happening on the major pairs right now. Currencies have run out of Usd momentum after absorbing a huge period of economic information recently, as well as half-year equity reporting. The eight-week consolidation phase now looks to be turning into a distribution reversal and a swing point high on the dollar index may be in place.
This is an introduction to how tenured traders piece together the major swings in market mechanics, and ride the momentum of the global market swing point moves by understanding participation, consolidation, distribution, and manipulation signals
Participation: When used as a confirmation tool that specific price points of note are also being monitored by others, participation is invaluable. Increasing institutional participation indicates an interest and/or a need to protect or break a specific price area. However, when compared to the volume reads that traders are accustomed to seeing in equity and commodity trade, forex volume is not an exact read of all market orders, but more of an indication that participation is above or below the norm.
The volume that we see in the spot currency market is however a fair reflection of the countable volume that is seen in the futures currency exchanges. On a higher market participation (volume) day, there is more chance of hitting a price target in good time, compared to a below average volume day.
Consolidation: Protecting the current price point, and not wanting to go up, or to go down as price action is contained. Consolidation phases usually happen on light volume and are times when fair value has been found and market participants are happy to hold prices steady.
Distribution: Liquidating the positions that are being held, but not wanting to reveal that it is being done, while getting ready for a move in the opposite direction. Distribution phases usually have heavy, erratic volume spikes as the commodity or asset is liquidated, and bought back in smaller amounts by the party looking to distribute. The buy-back has to happen in an effort to stop the distribution turning into a sell-off before the job at hand is completed.
Traders are at a stage in the market cycle that is one of the most frustrating to deal with, and where the most money gets squandered in trying to work things out, and to establish where fair value is actually placed. This stage is when the global market goes through a phase of consolidation; a sideways period of trade that looks to be absorbing the recent moves, while is anticipating a continuation of the previous trend.
Consolidation can sometimes extend itself so far, and for so long, that it actually turns naturally into distribution, where the asset starts to get sold as the realization that the original trend has expired, and forward momentum disappears. Add in low participation and low speculative interest levels, as we have right now, and market participants get comfortable with the status quo, just at the wrong time.
For experienced market participants, the move from consolidation to distribution phase is known to create the most market fear, or volatility, and that is what an experienced trader, with a plan, can feed off. There is no real way to confirm the move from consolidation to distribution until it is right upon us, and at that time the herd mentally tends to over-exaggerate the subsequent moves.
Trading through the distribution phase of global trade has to be well planned, have smaller targets, and a more flexible thought process that looks to buy support and sell resistance in the direction of the Daily and/or the 4-hour trends. The need to close trades in two 30% stages before the high/low of the previous session is hit is key.
The investor herd still has their head down as the distribution phase is happening; they are grazing on the previous trend, blissfully unaware that the change is happening on the mid-term charts. Once the market players have distributed their holding of the previous trend, and have positioned themselves going the other way, it becomes time to inform the herd that things have changed, to get their head up out of the trough and to get a stampede going.
A screaming headline is always good for that, something along the lines of; "Dollar strength in the face of NFP misery, Buy Dollars!!!" or “European Continent Slides Into The Mediterranean, Buy Euros!!!”.
The news headline, designed to wake the herd up, tends to reverse the recent headlines that were there to hide the efforts to distribute out-of-date holdings. Add in some high frequency trading (HFT) to get 2-3% moves just as each regional market is closing, and the major players have an easy job of moving prices.
Participation, Consolidation, Distribution, Headlines; the pattern is there, it has been for decades, and now seems to work even more efficiently in the automated bi-polar markets that are the norm in 2010. The main players are already in, they have worked the market mechanics, have linked the moves in the Treasury, oil, gold and equity futures markets, have used previous trading experience to get to know how participation, consolidation and distribution work. They are waiting for just one thing; the herd to realize that they are going the wrong way so that they can sell dollars into them.
Are you ready for the screaming headline? We have already seen the jawboning from central bankers and policy makers. All we need now is for the players to have had their fill and to start to push the buttons that will get the herd moving.
Consolidation? Absolutely, we have had global market consolidation for enough time that it may be turning into distribution as we watch.
Distribution? It would seem the way that U.S. trade patterns have developed that distribution is taking place; we have seen sporadic volume and some strange, untimely moves. One of the largest forex managed account companies, and pseudo-Federal Reserve market maker, just moved the long held year-end price target on Eur/Usd from 1.1500 to 1.3500 in a signal that they are now already positioned and waiting for the herd to move.
Participation? There is nothing strong about market participation levels recently, and that is the perfect foil to get a major job done, especially when automated 5-10% monthly melt-ups and melt-downs are accepted as the norm in the new generation global market trading arena.
Headlines? Oh yes, more than enough of them to start to realize that somebody wants the herd to move.
Daily Chart Detail: The breaks away from intra-day (inside the previous session high/low) price action areas on increasing participation, and major headlines, will be the key to being in the next trending phase. It is coming; all we are looking for is a volume spike over and above the norm on a daily close.
That will be the blow-out signal that the consolidation/distribution phase is through; a trending period of trade comes next, born out of the channeling period of trade that held things steady for quite a while.
TheLFB trade team will signal via the alerts service that market mechanics are about to move the herd, and now, just as the trade team signaled when the dollar index was unable to close through major resistance at 89.00, it looks as though the Usd may be about to get weaker through the dog days of summer.
The short-dollar moves are not a given at the moment, and there will be periods of Usd buying, but we do look to have the foundation in p-lace for a major Usd swing point high.