We return to looking at specific entries and exits for this three month period. We continue from mid to late November when price and CMF have both turned upwards. We assume we do not have any positions open as we examine our graph, but we recognize a new trend forming.
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Figure 6 - EUR/JPY pair from November 2004 through February 2005.
9. As price advances to 136 CMF hits the zero line and breaks back into positive territory. The price level 136 is important as it serves as a level of resistance. It may be indicative that both the CMF zero line and this level of resistance are breached at around the same time, and on very high volume.
- CMF continues heading up reaching +.10 near 137.
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Concept - The +.10 level is a good indication to buy if one didn't act when CMF passed 0. Waiting for +.10 can be considered a more conservative strategy, but more aggressive than a trader that waits for CMF to reach +.25. CMF has been heading up, and we see telltale signs of a market bottom. If a trader waits too long, he may not make any profit. An astute technical trader should recognize that accumulation is occuring when CMF retreats from -.20 to the zero line. Once CMF passes zero, the same astute trader would have to pull the trigger on the trade. If not, +.10 is a trader's second chance to get in on an uptrend.
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- At the first instance of reaching +.25 at the price of 140.5 traders choose to sell. There is some correction and profit taking. We have seen retractions occur at the +.25 level several times now.
Concept #2- This demonstrates why a trader needs to act fast even though these are daily graphs and long term trading. If a trader is too conservative, and waits until CMF hits +.25, he may have bought the pair just as other traders are taking profits and the pair is correcting/retracing.
- The Euro recovers and sees some further accumulation. CMF peaks at +.40, but on lower volume indicating that the trend may be weakening or that there isn’t much exuberance for the newer high price. It is also the case that New Years is approaching.
- New CMF downtrend? By the time the price peak comes CMF is already heading down and at +.25.
Concept #3- Even though the indicator is still positive, it is decreasing meaning the pair is experiencing distribution. CMF's downward direction implies selling pressure; price should follow with a drop.
- A trader doesn’t want to trade against the bias of the last 8 months, as explained on page 4. Then again, the traders that benefit are those that ignore the past year's history and sell the pair due to their belief that the distribution here will affect price for some time.
- With the star of the New Year, there is strong selling as the accumulation on weak volume to end the year is countered by Euro bears/Yen bulls. What might have started as a profit taking or correction, turned more serious. Traders that acted by selling (near 140) while the CMF was still above +.25 (against the discussion presented on page 4) would be in a profitable position at the end of the week. They would also be confirmed in their actions by the CMF falling further to +.10.
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Figure 6 reproduced- EUR/JPY pair from November 2004 through February 2005.
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- Fast Drop – For 3 weeks distribution continues until CMF approaches -.25 and price sets a new multi month low at 133.00.
- By Feb 9th, both price and CMF trends are changing. Price is ranging but slowly heading upward. With the end of January, selling pressure is drying up. If a trader notices this change from distribution to accumulation and gets signals from other indicators it is a time to buy (at 135).
A buy–sell–buy combination during this two and a half month period is equal to 850 pips. A short position from the end of December to Feb 9th could have earned 400 pips in 6 weeks. Those same 400 pips could have been even greater if profits are taken earlier during the bottom. This of course depends on a trader's risk management skills and tactics when it comes to entering and exiting positions.
