The currency in the spotlight this week is the Australian Dollar (AUDUSD). Let’s first take a big-picture view of the currency and look at the monthly chart. The first thing I check for is areas of ultra-high volume. We see that on the 1st of February 2020. We have a widespread down bar with the biggest volume on the chart. The VSA principle that appears on the chart is SOS 129 Potential Climatic Action.
The large volume on the climatic bar shows there is buying in the background by professional money and the pricing action occurred in fresh new low ground. With the next bar being up, this confirmed the professional buying. One or more of the professional groups have decided that the underlying market is now good value and will step in and absorb the supply. Covering of the shorts will add to the volume.
The very next bar was a reversal over two bars. The first bar was a down bar into fresh new low ground, with the next bar reversing the down move. The shorts on the down bar now need to cover their positions at a loss. This is strength and we are looking at a change in behaviour in the markets.
We set our trigger point on the high of the ultra-high volume bar and we wait patiently as this is now a period of accumulation by professional money.
Where there is ultra-high volume, will most likely be tested at some time in the future and this is what happened on the 1st of October 2022. The test checks if there is still selling pressure and the test on this occasion is on average volume. The test was confirmed with an up bar showing that there is no weakness in the market. Price is now trading above our trigger point. We’ll usually wait for a confirmed sign of strength to appear above a trigger point to take a trade.
Bar by Bar Action AUDUSD Monthly Chart
Let’s discuss each bar on the monthly chart of the AUDUSD. Point 1 is the action of two bars. The first bar is the down bar preceding which is a climatic bar. We can see that we have a widespread down bar with ultra-high volume. The bar closed in the middle of the range showing that professional money is buying in the background. The next bar is the reversal of price and the shorts on the down bar now need to cover their positions at a loss. The bar closes towards the highs which shows that strength has entered the market.
Point 2 we have a test-like bar as the price is marked down and then closes towards the highs. The volume is average which shows selling has dried up in the AUDUSD.
Point 3 we have an up bar which closes in the middle of the range. The volume is very high which shows that supply has entered the market. there is a VSA principle of “No Demand”. To confirm the no demand the next bar needs to be a down bar.
Rally Running Out of Steam
Point 4 the market continues higher with an up bar closing towards the highs with volume lower than the previous bar.
Point 5 Once again we have an up bar closing towards the highs with average volume. This volume is lower than the two previous bars. We also have a VSA principle “No Demand”. Once again we need to wait for the action of the next bar for confirmation.
Point 6 We have a down bar which confirms the weakness. The close of the bar is towards the middle of the range which doesn’t convince me that there is likely to be immediate selling pressure. The next bar is a down bar which closes on the lows but the volume is lower than the previous bar. To have continued selling pressure would have liked to see a slight increase in volume as prices are making their way down.
Point 7 we have two up bars which confirmed that supply hasn’t hit the market yet. In these two up bars, we have average volume, where the volume is lower than the last two bars. Yet again on the next up bar we have below-average volume and the volume is lower than the last two bars. This is not strength and we shouldn’t expect the price to continue higher.
Consolidation After Up Move
Point 8 we have a price consolidation. All five bars show weakness. They attempt to rally but the close of the bar is either towards the middle of the range or on the lows. The first bar in the consolidation we have a sign of weakness which wasn’t confirmed and this continued price consolidation.
Point 9 after the price consolidation price fell due to the weakness in the consolidation zone. A couple of bars during the down move had signs of strength which didn’t confirm. After the down move, we have two up bars on increased volume. Is this a manoeuvre by the smart money to start luring the uninformed investors to go long? The answer lies at point 10.
Traders Getting Trapped
Point 10 we have a trap up-move bar. This bar was specifically designed to entice investors to go long as prices are marked up and it quickly reverses and price closes towards the lows of the day. This is the ultimate trap of smart money. The only thing is the volume which is just above average but the volume is lower than the previous two bars. We start to see a change in the trend.
The next bar did not confirm the trap up-move. Certainly, the price was driven lower but the bar ended up closing in the top third of the range. The most important thing to look at here is the volume. The volume was borderline ultra-high which means there is supply entering the market.
The next bar is a down bar which closed towards the lows of the day by the volume was also border-line ultra-high which signifies strength.
In the following bar once again price was driven lower then reverses its move and closed off the highs with the volume being very high.
The rally continued but it reversed and the bar closed on the lows. Once again this is supply entering the market. For the next bar after this, we have a widespread down bar, but make note of the volume decreasing in this down move. How much longer can this down move last?
Test of Climatic Bar
In the final bar in the down move, we have a test bar which is testing the market to see if there is any supply. The test occurs back into the area of ultra-high volume. This scenario happens time and again when we have climatic action.
At point 11 we have confirmation of the test and the price starts to rally but look at the volume. For this to be a healthy rally we require the volume to slightly increase on each bar. The volume stays around average which is not much strength at all. The final completed bar is a down bar which confirmed the rally would not exist.
Potential Trade Setup 1-Hour Chart
There is a potential trade setup on the 1-hour chart of AUDUSD. This was highlighted in a webinar that Gavin Holmes, TradeGuider CEO presented recently. Let’s cast our eyes over to the 1-hour chart.
Point A we see strength entering the market with widespread down bars on ultra-high volume. On this day there was negative news with the CPI figures in Australia year on year came in worse than expected. Since then the price has been moving sideways. The price will rally up towards the trigger point and sell off and test the supply at the lows. This occurred at Point B and Point C. Each time we have signs of strength.
At Point D, the price action forms a higher low with a widespread down bar with a sign of strength, climatic action and stopping volume. This has now pushed prices up above our trigger point. A sign of strength is apparent on the third last bar which is a sign of strength with a confirmed test. But this is not a trade setup in my opinion because to the left we have formed an area of resistance. So, I would like to see the price push above this area and then give us a confirmed sign of strength.