I have been focusing on longer-term time frames and the ranges on these charts because in my opinion, this time frame offers the ability to often stand above the fray of the intraday volatility and provide a clearer (more psychologically relevant) view of the trend. This has been especially the case with the recent happenings of Egypt and Libya effecting the market around the world.
The distribution fade is always an aggressive (“aggro”) entry. The fade which is an exhaustion play that set ups within the context of a volatile, sideways range is confirmed by prices reached at a level (narrow price range) or area (wider price range) of resistance (ceiling) or support (floor).
The distribution fade is called such because of the “two to four o’clock” angle the 34EMA Wave takes on when prices are indicating a lack of an organized up or down trend. Simultaneously, prices are not quiet and narrow-ranging enough to be consider a flat, “three o’clock” angle either. Often identifying distribution is a process of elimination: Price action is neither steep enough to be an up or downtrend nor flat enough to be accumulation and what’s left is either a transitional market and/or distribution.
I often get puzzled looks from traders who are already familiar with Dow Theory and the trend or phases of the market: mark up, mark down, accumulation, and distribution. Remember that Dow (as in Mr. Charles Dow!) really didn’t emphasize or discuses mark down. Stocks (the market he analyzed and traded) carry with them a bullish bias, which essentially is an expectation for continued movement upward. Most traders do not short as frequently as say forex or futures traders do. I believe forex stands alone in many ways in the distribution market trend because while distribution is considered to be the unwinding of an uptrend as shares change hands at the end organized bullish sentiment and bullish momentum (think early buyers selling to the late buyers coming into the market and shares changing hands), the volatility of any trend unwinding often has similar characteristics. Forex pairs always have a bullish side.
In other words, as an uptrend in – for example – the current EUR/USD is being challenged, the 34EMA Wave has transitioned out of its “twelve to two o’clock” angle and into a more sideways “four to six o’clock” angle. This indicates a more “traditional” look at the distribution trend as it came at the end of an uptrend and the bullish euro loses ground against the resurgent dollar. I am still bullish on intraday, but the scenario gets interesting: Intraday double tops could lead to a correction lower into 34EMA Wave support.
A less “traditional” view is that of the distribution in the USD/JPY and USD/CHF. I should mention that the USD/CHF has broken not only the previous two range lows (0.9301 and 0.9328) but has not broken and accelerated through the 0.9300 major psychological level. So the support of distribution range has been broken as not even the near-term support at the 0.9280 minor psychological level could offer buyers a reprieve.
However, even when prices are transitioning out of a downtrend, there are classic distribution characteristics such as the volatility and wider trading range and exhaustion! Consider that there is a bullish element to a forex pair in a downtrend because one half of the pair is gaining ground against the other. Consider the range on the USD/JPY.
This pair had a prolonged downtrend as prices exhausted from just two pips below the major psychological level at 95.00 in the beginning of May 2010. Prices then turned sideways as the yen strengthened over the dollar. So as the (down)trend transitioned, the yen turned bullish as the dollar was bearish against it.