After the high volumes that was noted on the last post (zone 1), I wrote that if prices failed to continue the rally soon, this would be a sign of too much supply hitting the market and would be a probable reversal point. In the Asian session the prices failed to rise, and a bit more supply showed up as a churn bar (green bar) after a small rally. When the London session opened, the prices went down to re-test the previous area of demand.
In (2), we can see that the volumes picked up again, and VSA showed a demand signal. The volumes were also higher than the last top, which was a good indication of renewed interest in the up move. As the background was still strong at the time, Alert System indicator sent out an alert to go long on the high of this demand bar.
Prices continued to rally afterwards, and upon reaching a medium-term resistance at 1.138, Supply signals from the current timeframe and from D1 halted the move.
In (3), we can see a successful test (the test is the dark blue bar, 3 bars ago) near the prices of the previous demand, as the prices broke its high. The background is weak though, and so taking a long right now, while possible, is risky and would have to be with a tight stop-loss. Other EUR pairs such as EURJPY are looking better, since it’s just now emerging from a double bottom with demand as the current prices.
EURUSD H1 Demand Signal + Background
EURUSD has been in a strong uptrend after breaking out from a base last week. The prices also broke an important down trendline in a furious up movement, on high volume and wide range up bars. It’s now in a critical area that will be characterized by a high volatility.
In areas of previous resistances, this volatility and volume spikes are normal, and can be somewhat tricky to understand, but using VSA and Reversals this job is simplified as they’ll show the most important bars. We should first look at the background: it was strong during these movements, and so we should look for up reversals. In the hourly chart, the first one (zone 1) appeared at the same time as major supply, which is something to avoid. The other two (zone 2) were in an area of previous demand, and were soon confirmed by another strong VSA signal. Down reversals on the other hand, signaled less significant movements that lasted for a shorter amount of time.
EURUSD H1 – VSA, Volumes and Reversals
On to the current action (zone 3), Reversals showed a down Reversal, which marked almost the absolute high of this correction. Apart from that, after these such high volumes, I’d expect prices to continue further with small or no retracement. If they don’t keep advancing, it means much of that volume was supply hitting the market. The market has to show it’s not being conditioned by the supply anymore, with low volume bars or a successful bullish test, above the previous resistance.
Demand Near Support Failed Trade
- The background was weak – one should only look for short trades
- Prices had just broken a support. This is important because near a support, there will always be increased volumes from locked-in traders, which means any demand signals could just be from stoplosses being hit. You should wait for confirmation for the prices to break-through upwards again.
- A bit later there was a test bar (blue bar), testing for supply at lower prices (hence the lower low). As the prices failed to rally afterwards, it means the test failed and there was still too much supply in the market, namely from the big traders who sold before this movement started (where the Major Supply signals are present). This was an opportunity to close the trade earlier.
In my previous EURJPY analysis I pointed out that the prices were just testing a down trendline, and given the accumulation seen behind, it’d be wise to wait for an up-breakout of the resistance. Subsequently, this trade was taken based on these developments:
- The background was strong at the time of breakout, which maximizes our chances.
- There was accumulation behind, shown by multiple demand signals without the price going to new lows. Note: there is a difference between the older post chart and this one, as the previous was from GMT-5 feed, while this is from a GMT+2 feed, both in Oanda. Nonetheless, the market picture is fundamentally the same.
- The break-out showed increased volume not exactly on the break-out bar, but in the next one. This is usually fine, but I prefer to wait for confirmation when this happens. The confirmation was given a few hours later, after the low volume down bar was broken to the upside, showing clear lack of supply in the market.
- The first warning sign to exit was the extreme volume up bar, with no follow-up. Later a Supply signal from the Daily showed up, which confirmed the weakness. Closed when the trend turned yello. The take-profit from an alert would give an exit around these prices as well. However, if you have the time to manage your trade, and can react to changing supply/demand in the market quickly, trading without take-profit with this system also works.
Right now I’m holding a short position in the daily, as this weakness is just below a long-term down trendline. The correction is seeing relatively low volumes, but that could be normal after the distribution seen on the red bar. Either way, the trend is still down, and so, I’m just watching where the market takes me for now.
