I was checking out a blog I read occasionally, called Kevin's market blog. I love this blog because of his simple yet accurate use of technical analysis. Through the years I've ditched many blogs simply because their analysis is too mechanical or after-the-fact. Kevin's blog however has been in my RSS reader for quite some time and will remain there indefinitely.
Anyways, he mentioned that Euro was at a major support level and was testing the area. He was looking at the weekly and mentioned that it might look like the level will hold even though all he saw was bearishness. Take a look at the first chart. This is an equivolume chart of FXE on the weekly sample. FXE will be my surrogate for euro and I am working under the assumption that the supply/demand picture in FXE accurately represents that within euro or at least enough so on the longer frame to make a reliable analysis. As you can see on the equivolume chart, the previous three weekly bars are more wide than they are long and are getting larger sequentially. This indicates that although selling is increasing, support is also entering the market porportionate to or greater than selling and making it difficult for sellers to continue to push the market lower. So on the weekly, it looks like we might be finding some support in Euro. However, lets look at the monthly to get some context for this possible support.
The monthly is the second chart. As you can see at the area marked "1" we have a top in the euro clearly marked by a capping bar that occurs in July 08 (the narrow bar to the left of the "1" not the widespread down bar). This bar fails to test highs from April 08 and obviously has heavy selling on it indicated by large volume and compressed spread that made higher highs than the previous bar but failed to test the swing highs and closed very weak. The selling is then confirmed by a move lower that finds increasing volume as it continues to make lows. Number "2" marks the first downleg in Euro between July 08 and October 08. The volume is also marked "2" however some of the crescendo is found at the top of the structure and not all of it is on the downleg. Number "3" is the October 08 bar, as you notice from the number "3" on the volume, the participation in that widespread bar from Oct 08 is very weak and that, not surprisingly, is where Euro finds support and rallies through the following year's "Obama grace period." Number "5" on the price and "5" on the volume mark this counter-trend rally. Why is it counter-trend? Well first off the participation is weak, as demonstrated by decreasing volume as it rallies, the spreads are also narrower and grinding relative to the previous downleg, this rally never tests all time highs, and the break of the swing high marked by number "4" is characterized by no participation increase also price doesn't find any additional buyers after that fake break and closes decisively below it after one quick downthrust that essentially engulfs (for the most part) three months of buying. Number "6" marks the continuation of the downtrend with increasing volume as we move lower.
Just using basic volume confirmation we can see that the first downleg found increasing volume, the upleg did not and now the continuation lower is once again finding volume. This indicates that the trend is down.
So now we are down here at the swing low from October 08, we are finding participation down here, buyers and sellers who were not here in Oct 08. That observation, in and of itself tells me that value is now perceived as lower than it was previously. The simple fact that more people are willing to trade down here than they did in Oct 08 is bearish in and of itself. However we are also finding participation below the Oct 08 inflection point and the previous week, even though it is running into support, opened at the highs and closed near the lows on heavy volume and is also below Oct 08 lows on volume that is almost 3 times better than that found …