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.


Note:

Jimmy Young is a seasoned institutional forex trader having 20 years of experience with different banks. He headed up bank FX dealing rooms. He is FX profitability consultant to major European private bank. He manages funds and also trades personal money. Between 1981 and 2004 he was a foreign exchange trader at following banks: Societe Generale, Julius Baer, Fuji Bank, Indosuez, Erste, Hill Samuel, Manufactures  Hanover, Paribas, European American. www.EurUsdTrader.com