Congestion Count and the Yen

‘Congestion Count’ is a study unique to CQG and is often overlooked. While the count appears to be somewhat nondescript at first glance, it actually has extremely useful properties, particularly when identifying potential breakouts after sideways trends. The count can also act as a precursor for the beginnings of new trends.

The study has two settings. The first is set at ‘last’, and this number represents the total consecutive bars that are currently overlapping. The second is set at ‘group’. This number represents the total number of bars that are touching each other in terms of price on a consecutive basis. This presents two scenarios for analysis. The former highlights times when a range expansion is causing price to envelope a high number of previous bars, the threshold of interest begins at 15. The latter highlights when price is remaining in a very tight range and indicates that a breakout is due – here the threshold of interest is eight, although it does not tell you in which direction the breakout will come.

The US dollar/yen finds itself in a very unusual position. When trading the eurodollar, I use the euro/yen to qualify and confirm trading signals. Last week, as indicated in the chart below, we saw a rare StatWare-based divergence pattern. The two squares on the same bar indicate that both momentum and the rate of change of momentum where showing positive divergence. This was a warning that in spite of the negative sentiment against the euro, it was actually in a bullish phase. Read my blog from 10 October to put this into context.

Figure 1: US Dollar/Yen Divergence Pattern

Source: CQG

 

On 12 October there was a fresh development on the US dollar/yen on Congestion Count. The reading set to ‘last’ posted its second highest value in history (back to 1992.) The reading set to ‘group’ was also at its highest ever reading. As the move in the chart is up this means that the risks of being short are elevated in the extreme. With volatility so low bullish option plays now represent the best strategy.

20 views

Related reading