Technical Analysis

Sideways Movement

Continuing from the last page, a trader is holding a long position that was bought on February 9th at 135. We will examine one final period for information on individual buy and sell decisions. Following a particular pair in this way over a long time period, not only makes a trader more familiar with the working of the indicator we are using, but also with the recent history of a pair's movements.

12. Accumulation peaks in March around 139.00. Distribution becomes apparent when CMF retreats from a measure of +.35 to below +.25. If a trader can recognize a market top he should sell.
    1. If one sells at 139 where indicated, the downturn seems to last for only a short time. From the market top at 140, the pair moves 250 pips in one week.
    2. Once CMF reaches the indicators zero line price stops declining and rebounds. Our trader can make 150 pips if he exits here (buys) at 137.50.
    3. If the trader doesn’t close his position in time, then he will lose all of his profits when price turns back up. A trader that enters late, or buys the pair when CMF moves down past +.25 to +.10, accrues a loss on the position.


13. During April, May and June CMF stops trending; instead it oscillates between +.10 and -.10. This type of movement does not provide clear information on who is winning the battle for control between the pair’s bulls and bears. Other technical analysis tools and indicators (moving averages, trendlines, and overbought/oversold indicators) might be better tools to use during a period when CMF is moving sideways.
    1. After the bottoms at 137.50 (note 12b), CMF moves up but quickly turns back down after hitting +.10. There seems to be some divergence from price; CMF heads down while price moves up. This is an early indication to sell.
       
    2. If a trader doesn't act on the early signal, he would see price and CMF breifly rebound. However, when resistance holds for a third time around 140.50 while at the same time CMF reaches +.10 again, we have a second sell signal. This time, when CMF hits +.10 and turns down it does not diverge from price. Price responds to distribution in the "correct" way and falls to 135.
    3. After a period of consolidation, there isn’t much warning from CMF about the 400 pip drop to start June. The one clue is that the fall does occur after CMF almost reaches +.10, similarly to the case of 13b.


14. Price action forms a double bottom in June, which ends the downtrend that took the pair from 140.5 to 131.5. CMF goes into positive territory and above +.10 in the beginning of July. If one didn’t act on the double bottom this should serve as a buy signal. 

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