Determining a Currencies Technical Condition

Determining a Currencies Technical Condition
The technical condition of a currency is an important yet often
overlooked component in forecasting future price movement. The
technical condition of the market cannot be directly determined by
looking at charts or other technical indicators.
To get a good feel for the technical condition of the market requires a
special skill to think outside the box; read between the lines; a little bit of
contrarian thinking helps too.
What a trader tries to do is figure out “where the market is”, which means
are the short-term players long or short or have no position. Further, what
have the longer term players done lately that would indicate their
technical position (on the whole do they need to buy or sell around
current levels or is their business around current levels already done (they
have no interest).
Admittedly, there is never proof whether your assessment of technical
condition is correct or incorrect; other then putting on a position and
making a lot of money.
Let me give you an example. On Monday September 29th, 2003 the
EURUSD rallied from 1.1420 to 1.1580 in about an hour. This was more
than the range the entire previous week. Was this move predictable?
Mabye.
The prior week the EURUSD made new highs above 1.15 a few times
indicating an expected USD sell off would materialize. Each time a new
high was reached a breakout to 1.16 or higher appeared imminent; and
each time there was a lot of buying and then a lot of selling when the
priced dropped back below 1.1500. The EURUSD never really went
down much either though; bottoming out repeatedly above 1.1420.
Early Monday morning in Europe the EURUSD fell sharply to slightly
below 1.1400. This was a major disappointed to market players.
Everyone was betting on USD weakness after the G7 meeting and there
was no follow through from the opening in Europe the prior Monday to
the opening in Europe today (following Monday). To make matters worse
the EURUSD traded below 1.1420; lower than it traded all last week.
Traders bailed out of long EURUSD, in addition to long GBPUSD and
AUDUSD positions. The market was now preparing for a test of still
lower levels (higher USD); U.S. stocks were up overnight and traders
were thinking a blowout to the downside for the EURUSD, GBPUSD,
and AUDUSD was in the cards for today.
Opinion on the EURUSD was pretty much one way – its going down
today. All of the longs covered in disgust and armed with their charts and
technical indicators everyone was selling EURUSD for the move down
today.
With day traders short and the longer-term players already sold out of
their long positions after the repeated failures above 115; the EURUSD
was in a technically strong position. Meaning when EURUSD started to
go up the only sellers was short sellers; there were no long positions left
in the market. EURUSD gapped higher and higher, meeting first
resistance at 1.1580.