[B]Hello Emerald, and hello all fellow traders/Babypips peeps!
Here is an interesting bit of Volume Price Analysis for you, taking the NZD/USD as an example (and I declare,
once again, an interest, as I have been trading this pair for a few weeks/months)ā¦
What is interesting is to look at the following two charts:
CHART ONE: Nzd/Usd Daily Chart:
CHART TWO: Nzd/Usd Monthly Chart:
What we notice in Chart One is that the daily volume peaked to 1.5 billion on the
29th September 2014, when this happened:
Kiwi collapse: Government and Central Bank send NZD/USD to a 13 month low | Forex Crunch
Since nothing has quite moved the Kiwi as much as that event, we have been left
with a Nzd/Usd falling in line with a quietly zig-zagging bearish mini-trend (within
a larger, months-long bearish trend), with the (orange) 50-day moving average
right on top of daily candles, indicating that price has not much strength to reverse
the fallā¦
What is interesting here is that if one squeezed the daily chart back in time, one
would find that the highlighted event (29th Sep. 2014) had the HIGHEST VOLUME
since the beginning of volume data from FXCMās indicator, which is 2010ā¦ What
is significant, also, is that the orange-circled price action, corresponding with said
record volume, shows how the volume surge helped pushing the price and keeping
it below the very significant round-number level of 0.80, marked on this chart
screenshot as the upper of two solid red lines; high-to-low, the 29th Sep. candle
measured 161 pipsā¦ However, it was only on the 25th Sep. that a rather more
solid-looking candle, measuring 166 pips (high to low), pushed price below that
0.80 level, but with less volume, at 1.1 billion unitsā¦ In other words, the highest
volume surge in four years did not correspond to a large-body, equally impressive
candle at the end of a three-day dropā¦
The bearish trend seems to have slowed down at that point, compared to the two-month
vertiginous descent of 800 pips since Julyās heady heights around 0.88ā¦ While the high-volume
spike of 29th Sep. helped keeping price under the year-long significant level of 0.80, which had not
been breached for the entire year (2014), it certainly was not matched by an
equally impressive price action, given that 161 pips was, for example no match
for the 15th October candle, registering 189 pips with a much lesser volume
(just above 1 billion units)ā¦ However, the 15th October candle did nothing but
span (almost) the entire length between the two solid red lines on Chart One, namely
the 0.78 and the 0.80 level, and fail to break above the latterā¦ and, indeed, price
has failed to break above 0.80 sinceā¦
Now, if we zoomed out onto a monthly chart, we notice something even more
interesting in terms of Volume Price Analysisā¦ Let us move to Chart Twoā¦
What we see on this second chart is that the monthly volume in August, September,
and October 2014 was increasing greater, peaking at about 17.5 Billion units in
Octoberā¦ However, did price match this volume swell? Clearly, if we look at
the orange-circled area in the chart, the September candle spanned (low-to-high)
and impressive 683 pips, and was an almost entirely solid candle: however, it was
not matched by the highest volume, as this achievement went to the following month,
and what is interesting to see is that in October there was not only a candle HALF
the size of Septemberās, but also one that was almost entirely body-less (call it
a Doji, if you wish)ā¦ So the month that gave us the highest DAILY volume on
those Kiwi/RBNZ news we spoke about in discussing Chart One was also the month
with a matching large, solid-bodied bearish candleā¦ This candle, incidentally,
was almost a mirror version (bearish, rather than bullish) of the Sep. 2013 candle,
which also spanned around 700 pipsā¦ However, that candle had LESS THAN HALF
the volume of the Sep. 2014 candle, and yet it helped the NZD/USD past the 0.80
level and on to new highsā¦
So, which is less trueā¦ the Volume-Price relationship of Sep. 2013 or of Sep. 2014?
Well, both pushed price past the historically significant 0.80 level (respectively
above and below it): interestingly, on both occasions
it was the fundamentals to move price one way or the otherā¦ In the first instance,
it was the market talk of the RBNZās rate-hike bets
(http://www.bloomberg.com/news/2013-09-26/aussie-kiwi-hold-loss-versus-peers-amid-u-s-debt-limit-concern.html);
in the second instance, post-2014 RBNZ rate hikes, it was the realisation that those
rate hikes had been overdone and that the RBNZ had actually decided it had
nowhere to go (in terms of matching the marketās expectations of its rate hikes
continuing)ā¦ A typical example of the markets front-running an event (i.e. rate hikes)
and then crashing down once reality kicks in (think of the GBP/USD crazy run and
subsequent bomb-dive, all based on speculative front-running of āpossibleā rate hikes
from the BoE, which never happened)!
So you can see that sometimes Volume Price Analysis can really throw some
interesting scenarios, with similar powerful price moves not matched by equal
volumeā¦ It is all about context, and about interpretation: as Anna Coulling would
say, it is an ART, not a scienceā¦
Finally, what we see in the Volume Price Analysis of the monthly Nzd/Usd chart
(Chart Two), is that in the months of October, November, and December 2014
there has been a falling monthly volume, accompanied by NOT ONE but THREE
Dojis on the chart!! Even more interesting is that while the massive September
candle brought the price to a close just about bang on top the 0.78 level (closing
at 0.7807, to be precise), thus failing to break it, the subsequent three months,
with three Dojis alternating a bearish, bullish, and bearish lean, all failed to do
anything about the 0.78 level, with the Oct. one closing at 0.7783, the Nov. one
at 0.7810, and the December one currently looking similar to the Oct. one at
0.7785 (at the time of writing this thread post)ā¦ In other words, price has
been compressing just below the 0.78 level FOR THREE CONSECUTIVE MONTHS
but failing to move past it or closing significantly lowerā¦
What does this bode for the new year, 2015? Well, with the USD moving towards
its own first rate hike in a long time, and with the volume that it carries, both
as a global currency and a huge economic powerhouse, it would be tempting to
think that the NZD/USDās fundamentals are looking rather less attractive on
the bullish sideā¦ Combined with this is the fact that, even without engaging
in a (dangerous) game of picking tops, the NZD/USD is at its highest levels of
two decades of price history, and has failed to break its 0.88 peak in three years
of price history (the level was tested and rejected in July 2011 and in June 2014).
On the downside, there is nearly a 3,000-pip run from current price to the low
of late-2008/early-2009, at the end of the global financial crash: while pushing higher cannot
be deemed impossible, the higher probability in a longer-term perspective seems
to be resting on the side of a Kiwi Dollar depreciation against its North American
counterpartā¦
Will the bearish thrust initiated in July 2014, paused in the last three months,
resume in the new year?
We shall seeā¦ in the mean time, I will be watching this pair with great interest,
and continue to hold shortā¦
Happy trading.
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