Traders are at a stage in the market cycle that is one of the most frustrating to deal with, and where the most money gets squandered trying to work things out. This stage is when we go through a phase of consolidation, moving sideways consolidating the recent moves made, while anticipating a continuation of the previous trend. Consolidation can extend itself so far, and for so long, that it actually turns naturally into distribution, (where the asset starts to get sold as the realization that the original trend has expired), when there is no more forward momentum. Add in low volume levels, as we have right now, and volatility starts to decrease a little. As market participants get comfortable with the status quo.
Volume: When used as a confirmation tool that the price point chosen being monitored by others volume is invaluable. But as an exact count, as traders are accustomed to in equities, it is like comparing apples and pears; both look good, both work, they both taste different, but both have a benefit in use. The volume that we see in the spot forex market reflects very well the actual, countable, volume that is seen in the futures currency trade. On a higher market participation (volume) day there is more chance of hitting your target in good time compared to a below average volume day.
Consolidation: Protecting the current price point; not wanting to go up or to go down. Consolidation phases usually happen on light volume.
Distribution: Liquidating the positions that are being held, but not wanting to reveal that it is being done whilst getting ready for a move in the opposite direction. Distribution phases usually have heavy, erratic volume spikes as the commodity or asset is liquidated, and bought back in smaller amounts by the party looking to distribute; they have to buy some back to stop the distribution turning into a sell-off before they are finished distributing.
Distribution: A sideways pattern of trade that is caused by the distribution, or selling of an asset before a reversal of the recent move occurs, looks to be happening on the major pairs. They have run out of forward momentum, and the consolidation phase has now turned into a distribution reversal; a swing point.
For experienced market participants, the distribution phase is known to create the most market fear, or volatility, and that is what an experienced trader with a plan can feed off. There is no real way to confirm the move from consolidation to distribution until it is right upon us, and at that time the herd mentally tends to over-exaggerate the subsequent moves.
Getting into the distribution phase with a trade has to be well planned, have bigger targets, and a more flexible thought process. The herd still have their heads down as the distribution phase is happening, they are grazing on the previous trend, blissfully unaware that the change is happening on the four hour charts. Once the market players have distributed their holding of the previous trend, and have positioned themselves going the other way, it becomes time to inform the herd that things have changed, and to get their head up out of the trough, and to get a stampede going.
A screaming headline is always good for that, something along the lines of; Dollar strength in the face of NFP misery, Buy Dollars!!! The news headline, designed to wake the herd up, tends to reverse the recent headlines that were there to hide their efforts to distribute their holdings. Yesterday, it was More misery for the Dollar as Recession looms!!!.
Volume, Consolidation, Distribution, Headlines; the pattern is there, it has been for decades, and still always seems to work. The Players are already in, they have worked the market mechanics, have linked the moves in the treasury, oil, gold and futures markets, have used previous trading experience to get to know how volume, consolidation and distribution work, and are waiting for just one thing; the herd to realize that they are going the wrong way.
Are you ready for the screaming headline? We have already seen the jawboning from central bankers and policy makers. All we need now is for the Players to have had their fill and to start to push the buttons that will get the herd moving.
Consolidation? Absolutely, we have had ten days of forex consolidation.
Distribution? It would seem that the way Asian trade patterns have developed that distribution has taken place; we have seen sporadic volume and some strange, untimely moves.
Volume? There is nothing strong about market participation levels recently, and that is the perfect foil to get a major job done.
Headlines? Oh yes, more than enough of them to start to realize that somebody wants the herd to move.
Daily Chart Detail: Take a look; all of the majors have consolidated so much that they are all dealing with one daily chart SMA area or another. The breaks away from these areas on increasing volume and major headlines will be key to being in the next trending phase. It is coming, all we are looking for is a volume spike way over and above the norm on a daily close. That will be the blow out bottom signal that the consolidation/distribution phase is through; a trending period of trade comes next.