Example 3 - Fundamental Release

The analysis starts during a ranging market. The A/D indicator will not give clear signals during these times as it relies on trends to show divergence. At first, from May 14th to May 24th there is a bullish divergence. A/D formed a new high but price does not reach a new high. Therefore volume points to buying pressure. Right after, the next couple of price highs are not received with high volume and a bearish divergence forms. Which one should a trader believe? If the pair stays in a ranging market the second divergence might not have been very useful either.

A look at fundamentals helps here as speculation the FED will stop raising rates or keep going after 5% creates uncertainty. After three weeks of up and down price movement, the bearish divergence sets up a situation that if fundamentals lean towards USD, it will gain. At this point, A/D shows selling pressure. What happens? High inflation numbers come out in US and the relatively new FED chairmen very plainly says that this is an unwelcome sign and points to another raise to 5.25%. The “divergence set up” plus this bit of fundamental news quiets the uncertainty around the next raise. What happens to the price of the EUR/USD?

The pair succumbs to the selling pressure present in the second, bearish divergence. In one week there is a drop of 300 pips!

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