BarroMetrics Views: Shortening of Thrust
Continuing from Thursday’s ( 05-30) blog….
‘Shortening of Thrust’ is a tool for identifying end of moves. It’s to used within a context – the most important of which are:
- a possible termination zone, and
- the volume and range relationship. Are we seeing from a possible climax and/or from the volume and range relationship, a possible end to the current swing?
The idea is best explained by an example – let’s take the AUDUSD. For the volume/range component, I’ll use the futures contract of this FX pair.
Figure 1 shows that the monthly AUDUSD and shows that the pair has been in a sideways mode since 07-2011. There are three levels of support and resistance; in order of magnitude:
- 1. 1080 to .9581
- 1.0856 to .9581
- 1.0612 to 1.0151
The pair broke below the lowest magnitude support at 1.0151 and is now in the second magnitude Primary Buy Zone. For reasons I won’t go into here, I expected the AUDUSD to break below .9581, and possibly .9387.
However, last week the AUDUSD started to show that the current down swing may be over, and that we may see a swing up. The matters of note:
- Figure 2 shows the weekly perpetual futures contract – we see the pair is at the Primary Buy Zone.
- Figure 3 shows the daily perpetual futures contract – we see that despite the increase in volume, there has been little downside progress.
- Figure 4 is the shortening of thrust data for Figure 5’s calculation. We see that the average spread between the lows is 55 pips, with a standard deviation of 7. We can therefore expect that any range below 36 pips ought to occur only 1% of the time.
- From Figure 4, we see that once the AUDUSD entered the Primary Buy Zone, the low to low range was 37 (5/28) and 28 (5/29) (Figure 5). Add this to what we know from Figure 3 – failure to establish new lows in the face of increasing volume, and you have grounds for believing that a rally is on the cards.
- Finally, Figure 6 – the 60-min VBI of the FX Futures. You will see the divergence prior to a sideways move.
Having an understanding of shortening of thrust, provides a trader with an invaluable tool.
Tomorrow, the blog will the request Ryan made on 05-24:
“Where I struggle is in the rich process of generating the alternatives actions that are necessary for this process to evolve. Any further commentary on this topic in future would be great”.
FIGURE 1 Monthly AUDUSD
FIGURE 2 Weekly FX Futures Perpetual
FIGURE 3 Daily FX Futures Perpetual
FIGURE 4 Daily Shortening of Thrust
FIGURE 5 Mean and Std Shortening of Thrust
FIGURE 60-min VBI FX FuturesNearest Continuation
Chart through the courtesy of MarketDelta