AUD/USD

Last Thursday I went long the AUD/USD at .8586. I moved my stop Friday to .8596 and was taken out last night during the Asian session at that price. I just went long again at .8570 so I’m in at a slightly better price than the last trade. Had I not been mucking about with the Euro charts for so long or not gone for a cup of coffee I might have noticed when it hit the near bottom of the range but there you go.

One thing I won’t do in this blog is hypothesize about possible trades. Lots of people put out a lot of analysis that has nothing to do with whether or not they’re really trading. Jessie Livermore tells the story of a guy who was going to fight a dual the next day (Reminiscences of a Stock Operator, page 27).

His second asked him, “Are you a good shot?”
Well, said the dualist, “I can snap the stem of a wineglass at twenty paces,” and he looked modest.
“That’s all very well,” said the unimpressed second. “But can you snap the stem of the wineglass while the wineglass is pointing a loaded pistol straight at your heart?”

Like Jessie, I need to back my opinions with my money.

Looking at the three hour chart, there’s a range of .8543 to .8676. Another thing that struck me on the chart was the beautiful symmetry of the moves back in August. From there it moved out of its triangle and is currently in a consolidation range. It’s showing some symmetry here as well.

Notice that it’s well above the .618 retracement of the July to October ’08 move down. And, as I wrote last week, this .8500 area is significant historically, all the way back to the 1980s. My Gann calculations on different highs and lows also show the significance of this area. It has also cleared the .8524 high from back in September ‘08. Why do I consider that high significant? Because it was the last high before the egregious move down. So if it can get above its current range high of 8676 it might have some significant moves ahead. If it breaks below, it will also be significant.

With a trading range such as this, also known as a rectangle, box, or horizontal channel, the price must touch the support and resistance lines at least twice. Edwards and Magee, in their classic work Technical Analysis of Stock Trends, believed ranges were most often continuation patterns. It’s also worth noting that there are many false and premature breakouts (Encyclopedia of Chart Patterns, Bulkowski, 2000). Regardless, the pair will exit this range eventually. Even if you just trade support and resistance though, it’s a wide enough rectangle that you could pick up 70 to 100 pips with tight stops. However I’m hoping to not have that kind of trade because both the upside and downside on a breakout offers much more potential profit.

Another thing I like about the pair on this chart is that RSI isn’t falling too far on the reactions. That’s a bullish sign. I use RSI primarily for divergences and for such things as this and not usually for buy or sell signals depending on overbought or oversold levels. There is one concern here, though, in that the RSI is showing momentum is falling off so there is some divergence.

As usual, I’ll just have to continue to study price action. And of course I have a tight stop since I entered near the bottom of the range.

None of the above is a trade recommendation of course. Remember that trading involves substantial risk.

© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.