When an economic number hits the markets, traders take action and the “inside market” — that is, the current bid-ask spread — jumps around rapidly. The problem is, the inside market can move so quickly it is difficult to decipher what is happening in the market until well after price has made its move.
Price bars don’t provide information about the inside market; they simply plot the last price that occurred. For example, It shows a one-minute chart (with volume) of the June 2006 euro currency futures (ECM06) before and after the release of the U.S. employment numbers on May 5. Although most people think of the impact of the employment report in terms of the stock and bonds markets, the forex market also anticipates these numbers and can be rocked by unexpected developments. It shows the euro’s dramatic reaction to the 7:30 a.m. CT announcement that the nonfarm payrolls number came in lower than expected and the previous month’s number was revised down. U.S. interest rates fell and the dollar weakened, resulting in a spike in the euro.
Prior to the release of the payroll number, the typical one-minute bar for the euro had ranged from three to five ticks (the tick move in this market being .0001). The range of the oneminute bar immediately preceding the release was 18 ticks, from the low of 1.2712 to the high of 1.2730. Also, this bar closed at its low. Then, when traders finally saw the employment numbers, the next bar jumped immediately to 1.2730 and rallied to 1.2784. Clearly, traders were aggressively lifting offers over the next two minutes, but what was really happening in terms of available opportunities to execute trades? The one-minute bars don’t provide a very good indication of the changes occurring to the bid-ask spread.
Other tools can be used to help shed light on whether buyers or sellers are controlling the market on an intraday basis. In addition to whether price is moving higher or lower at a given time, it is useful to know whether trades are occurring at the ask price (which reflects buying pressure) or the bid price (which reflects selling pressure), as well as the relative volume of those trades. For example, more trades occurring on the ask than the bid might seem bullish, but if those trades are occurring on very low volume, the market’s strength is more suspect than it would be if volume were higher than average.
The following section uses this kind of information to analyze the market’s behavior after the release of the employment report.
Subscribe to:
Post Comments (Atom)
Post a Comment