17 August 2010

Money Flow, Structure and Forex

The rally today had signs of a money flow rally, the ebb at the end, but I still see signs of that real recovery within it. Let's look at forex charts again. When I am analyzing forex charts I apply a number of methods. One of the clearest methods I know for getting a precise sense of structure is the 34 EMA of Raghee Horner (in her books). I use this sometimes along with RSI and MACD. For RSI I am looking at where it is in relation to extremes and 50, and for MACD I am looking for crosses.

Predictability is another matter, but this blog has discussed this issue in forex. If you put the Dave Wave on the weekly EUR/USD chart one sees EUR/USD reversed at the top of the wave. Typically this can indicate a trend down still in operation, but forex can recompute this kind of directionality.

On the monthly chart, the technicals, RSI and MACD are pointing towards a possible continuation of the rise, if the correction can be overcome. The top of the Dave Wave here has caused a bounce, that is bearish, but the candle suggests indecision (as you go deep into the charts on lower time frames, you see this indecision reflected in a loss of momentum). The Dave Wave on daily suggests this continuation possibility as well.

It must be said the structure of the RSI is pretty bearish still, it needs to convincingly get above 50. RSI on weekly reveals more precisely what is happening, the bearish momentum has caused a correction at 50. When trading the 1 min, there is usually a correction at 50 and similarly here.

It is those precision valuations I talked about yesterday, precision at 1 min cascades up to monthly. But it is a precision whose information content degrades over time. This means as you look deeper into charts from multi-time frames there is a sense of information degradation, but everything seems still so precise.

That is the benefit of a fractal structure, which forex purely is. It is just not a connected matrix, the fractality is free floating (another way of putting, how patterns can be so hard to call in forex, they are only obvious after the fact and then stunningly so), hence the signal degradation. In the Dow and perhaps oil, it is a connected matrix, connected by the growth factor I discussed. Information is restored in this conceptual framework.

This makes it less precise but more predictable, a phenomenon found in nature but not really the natural world, more in fundamental structure. This may come from the input of minds into investing and commodities (price setting etc.) versus the input of machines into forex. The problem is the money flow is making the Dow pretty free floating, subject to random surges and corrections, just like forex.

So what does this analysis suggest, as always anything can happen, that it the truth in forex. For me, I am mindful of the comments I made in this blog, that USD/JPY hit major long term structural valuations at its recent low. Fundamentals are something to hold onto in forex, it is why the EUR did not continue its rise but at least corrected, something this blog was suggesting as well.

It is just fundamentals do not have as much hold on the forex market as they *normally* do in equities. This blog believes as well there is something more in forex, a kind of computation which references economic growth and this maybe what the USD/JPY low is referencing. That is a positive sign.

If it does fall back down that is not so positive (can China be the source of this revaluation ?), there are other forces beside company growth at work in this economy as this blog has pointed out. Remember as always these are comments on long term charts (for oil as well) and these things take time to play out.

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