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.
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.
Euro/Yen has been ranging since the beginning of January, when looked at from a 4-Hours perspective. Volume-wise though, it has been very active, and understanding this activity is essential to know what the major players are doing.
- First there were several demand signals just as 2016 was starting. This halted the down move. Afterwards there stopping volume when reaching 129.0 area (red bars).
- More recently, there was a major shake-out, painted as Major Demand by VSA – there was a lower low made, yet prices closed on the highs of the bar, and above the previous support. This was a move to hit stop-losses which provided plenty of liquidity for professional buying.
- Approaching the down trendline, there was a no-demand test (pink bar) – as prices penetrated the trendline, the volumes didn’t keep up, which means there wasn’t much demand. On the next bar, prices refused to close down though, on a relatively high volume. This could mean renewed interest in an up move, and the confirmation will be the trendline break on good volume (checking the hourly might be the best). If the bearish test succeeds, as in a failure to seeing a breakout of the trendline and/or test’s high in the next bars, I’d expect prices to drift downwards onto the support. The ultimate level to watch for is the resistance at 129.074.
Like it was wrote on the last post, lately USDJPY, on the daily timeframe, was marked by 2 significant events: a shake-out (major demand), and supply after the rally. The other 2 points, refer to what happened afterwards and what is happening right now.
- On point (1), there was a big shake-out in the market, which VSA marked as major demand (as the volume was also very high). This shook-out many of the longs who held their stop-losses at those prices, until it made the intraday low in an area of previous demand, where the smart money supported the prices. After a series of tests the market rallied, and it reversed again on supply signals. That’s the past of course, but it’s important to keep things in perspective to understand what the market is doing right now.
- On point (2), there was a breakout, though a very unusual one – the volumes were very low. This is however a regular calendar event, before and after Christmas, when most traders stop trading altogether, and so unlike in normal circumstances, the low volumes on the breakout shouldn’t be seen as weakness (other factors should be analyzed instead). And unlike popular wisdom, this is one of the best times to make money on the markets, as there is virtually no resistance to a movement from short-term speculation, and likewise supports/resistances stop being a resistance to price movements, as most traders are enjoying their holidays. Many veteran traders however, use this time of year to make their important plays.
- Right now, there is some demand in the market, in the previous area of demand. The market is still trending down, which is confirmed by the weak background, and so it may be still too early to take a move. (3) marks the zone where we should watch for a trend change (e.g. dynamic trend to green). H4 could be used to trade in this zone, as the H4’s background will turn strong faster if prices are sustained. In any case, the alerts indicator looks automatically at different background periods and alert when the background confirms the strength.
USDJPY Daily
On the hourly timeframe, we noted there was some demand coming in. However, on the early hours of 4th January, just a few bars later, very high volumes came in, first on narrow up bars, and then on wide spread down bars. This was heavy selling coming in, as traders were buying near the up trendline and many professionals were using the liquidity to sell (and thus keeping the bar’s range narrow), and in the 2 next bars no buying could stop the selling anymore, and the market went down violently on high volumes. It goes to show that you must be fast on your feet, as things can change quickly in the markets.
USDJPY Hourly
NZDUSD H1 Trade analysis:
- At the time of entry background was strong – background didn’t have time to turn weak and it is wrong to go short in this case
- Weak signal (Minor Supply) before trend changed (moreover this signal appeared near mid-term resistance) – this is a correct setup for a short trade.
- Entry after dynamic trend turned red – it is o’k (the best way to open trade in a low volume up-bar while the price is not far from market turn). It is better to place stop-loss above resistance (in our case it is below – not o’k).
- Trade has to be immediately closed after two Minor Demand or Demand, Major Demand signals, because there is a big chance that prices will turn direction after this signal. Reversal signal also confirms market turn in this place.
This is a near resistance trade which was opened after up-thrust in USDJPY.
In this chart we have long-term resistance which was created by previous high. At first market was rising, than we had an up-thrust (2 wide spread bars with high volume).
Up-thrusts can be recognized as a wide spread up-bar, accompanied by high volume, to then close in the middle or on the low. Up-thrusts are usually seen after a rise in the market, where the market has now become overbought and there is weakness in the background.
High of the first bar has almost reached the resistance level but closed in the middle. Further weakness showed in the second bar which closed on the low. VSA indicator detected 2 very weak signals here (Major Supply). Reversal indicator also suggested that market can turn in this place.
- In H1 timeframe background was neutral. In this case you should check above timeframe. H4 was weak, so it is o’k for a short trade.
- Several very weak signals (Major Supply). Reversal indicator also confirms market reversal in this place.
- Entry was made when dynamic trend was red.
- Exit after 2 Minor Demand signals (Reversal signal also confirms the exit)
Total: + 110 Pips
