Every trend goes through a period of consolidation or burn out. The simplest way to identify consolidation is to observe when prices action move sideways instead of directionally up or down. The longer that period of consolidation lasts, typically the more pronounced the ensuing breakout will be. It forms part of the theory of the Elliot Wave which builds into the model the idea of consolidation leading to a minor retrace before resuming the overall trend.
The Swiss Franc was the first of the currencies to retrace its gains versus the Greenback, shortly after breaching Dollar parity. Yesterday’s price action was intense on this pair as indicated by the long upper and lower wicks and the short candle body. This demonstrates indecision between buyers and seller especially when the close is a few pips off the open yet the highs and lows top 250 pips. Additionally, you can observe the sideways manner that price is beginning to move with narrow Support and Resistance lines. A solid close above or below those level will most like forecast the price action to come for the near term.
This chart below is the potential “after” view of the CHF chart above. The Pound was trending down until it hit a period of consolidation. Note the long wicks trying for force price down further. However, the GBP held firm as it would not close near the low and you can confirm that by the tight range the candle bodies themselves trade in during this period of consolidation. For the time being that period has ended with a breakout north of Resistance as the GBP looks to pare its losses.
The Kiwi has been exposed to more recent volatility the other pairs but it is still trading sideways as depicted by the horizontal Support and Resistance lines. Again, note the long candle wicks which demonstrate the market’s indecision. Many traders point to the one long blue candle (see blue arrow) that opened at Support and breached Resistance. Very Long candles show strong moves but in order to substantiate a strong move it needs to be followed by supporting price action which it is not. That same candle starting near Resistance could be interpreted differently as a chartist would conclude it was a long body candle because it finally broke Resistance. Since, the current close is still with in the Support and Resistance range, price is still deemed to be consolidating.
Written by bforex.com