We however focus on reading price action context, because this skill can help you learn how to read price action in real time, while understanding the order flow behind it.
Let’s dive into this pair and talk about how you can spot the exhaustion price action ahead of time, and how you can trade it.
USD/CAD Price Action (1hr chart)
Looking at the 1hr chart below, we can see a few horizontal lines on the chart, which represent a few key support levels (A & B).
Both of these levels are role reversal levels, meaning they were treated as resistance by the market, but then treated as support. This increases the strength of a key level, because it means both sides of the market (bids and offers) feel this level is significant enough to place trades around it and stop losses above/below it.
The first level A is really where the most recent run up from 1.2387 to 1.2800, with the bulls holding the line here.
NOTE: We had a buy setup triggered here which we wrote about ahead of time.
The second level B was more of a short term (ST) role reversal level. I say ‘short term) because it only acted as resistance for a day, and then support for half a day. Contrast that to level A, which acted as both resistance and support for several days.
Defining Exhaustion Price Action in the Charts
Before we take a closer look at the price action on the charts, I’d like to briefly describe what it means when we say ‘exhaustion price action’ in the charts.
For definition, exhaustion moves in the market tend to manifest on long or over-extended trends, which is a common theme in forex for trends to run longer than anticipated.
The move becomes ‘exhausted’ when there really aren’t many players left to enter on the buy or the sell- side. This creates an imbalance in the order flow to one side of the market.
The last players to usually enter a trend are the retail traders, and part of the actual price action is meant to bring in those last trend/momentum chasers, so those taking profit or wanting to exit have the liquidity to do so.
From a price action perspective, this usually manifests in a) a parabolic type move, b) a large bar (larger than almost any bar prior).
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USD/CAD 1hr Chart (Closer Look)
Looking at the chart below, we can see three green boxes marked A, B & C, all containing large impulsive moves with trend. If you look at the first two boxes, you’ll notice a pattern – that the impulsive moves in the price action were across a 3-4 hour window (3-4 candles).
However, the last one was a little different, and this was one of the tips which led me to suspect an exhaustion climax move before it happened.
This last move in box C was a large impulsive move, but only within one candle. The 1hr bar was the largest in the entire series, suggesting this had the most amount of players into the market on the bid.
Another tip was the corrective moves following each impulsive move (marked in red boxes 1, 2 & 3). In the first two corrective phases, the consolidation was near the highs, with very little pushback from the bears (no strength).
However in the last box (3), we can see the consolidation was near the middle of breakout bar, but also showed more aggressive pullbacks, suggesting a) more profit taking, and b) more strength from the offers.
This led to a lower high, and then sharp reversal today, breaking the prior support around 1.2671, something the market had been unable to do since the last week or so in January (break prior support).
Where to Go from Here?
I suspect a deep pullback is in order as a) a lot of bulls unwind their positions, take profit, have trailing stops triggered, and b) the order book unwinds a bit from the overly bullish bias in the order books as of late.
The first major support zones I am looking at are;
1) the consolidation around 1.2525-1.2555 which is where box 1 is
2) between 1.2380-1.2410 where this most recent bull leg started
I’m guessing bids will be parked in those regions with trend players, with stops below 1.2375. A daily close below here would likely trigger larger medium term stops, and suggest a deeper unwind is taking place.
Considering the BOC has recently surprised with cutting rates to .75%, and hinted at further cuts, I’m suspecting institutional players will be happy to buy on pullbacks at a cheaper price, so am looking to buy on pullbacks.
Medium term my bias will only change on a daily close below 1.2375 & 1.2300. Upside targets remain at 1.2790 & a longer term resistance level just above 1.3045 as there is talk amongst the larger players that will be hit in Q1 or early Q2 2015.
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