USDCHF trades near old trend line but still well below day's high

Technical Analysis

Author: Greg Michalowski | usdchf

Liquidity air pocket in the 1st hour of trading today.

The USDCHF is moving to test a topside trend line at 1.0049  The price in the NY session did extend above that line to 1.00527 earlier in the day, but that break failed quickly.  

Liquidity air pocket in the 1st hour of trading today.
But wait, the high for the day says "1.0092".  We are at 1.0045ish.  What gives?

Well if you look more closely at the hourly chart above, the first bar of the day had a high at 1.0092 and a low at 0.99807.  That hourly bar closed at 0.99897 - over 100 pips from the high. The price spiked higher but came back down just as quickly.  

You can see the spike more clearly on the 5-minute chart below. 

The market opened at 5 PM ET and 5 minutes into the day, there was a air pocket with limited liquidity and the price shot higher.   After peaking at 1.0092, 25 minutes later the price was trading at the lows. Since then the price has moved higher with a more normal trajectory.

The USDCHF shot higher as liquidity was light
The move may have been orchestrated by traders looking to take advantage of the liquidity situation at the start of a trading week.  By buying a relatively small amount (it still takes some volume but not near the amount in the heart of the day), a big player can indeed move the market - and move it a lot.  IF their are resting stops, the push can become a pretty strong shove.  After the run higher, the inital buyers sells into the stops and books a handsome profit. They may then put in a redemption notice and take the money out of the broker.   

Tha action reminds me of a daily trade that was done a number of years ago.

At that time, at the close of the day and into the new day, there was a buy (or sell) "program" where lots of buys came in the USDCHF right after the end of the trading day at 5 PM ET. 

Because of limited liquidity, the market makers moved the price higher (assuming they bought) in response to the flood of liqudity.  No one wants a huge position in USDCHF at the beginning of the new day when liquidity is light.  At which time, the same buyers sold back the position at a higher price and booked a profit.

After getting hit in the head a number of days in a row, the market makers started to widen the bid/ask spreads to very wide levels to counteract the liquidity arbitrage "trade".   

Last night's price action reminds me of those days.  Are the traders back?  Perhaps, but what I would expect is that the market makers, not continue to get hit in the face each and every day.  Instead, I would expect that the dealers widen the bid/ask spreads at 5 PM ET and also reject deals if they feel, the trade size does not match the market liquidity.

In the meantime, I will ignore the spike and use the old trend line as resistance.   The 1.0092 high is an aberation.     

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