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.

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.

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.