Friday morning (10/2)

AUDUSD
I’ve certainly attended to Ozzie’s travels this week, from its low of .8587 at the beginning of the week to the high on Wednesday at .8860. As I write this at 4:40 AM EST it’s down to .8659. Quite possibly it’s headed lower yet. As I pointed out yesterday, an uptrend line I drew on the monthly chart from the lows earlier in the decade came in right about at the high. This old trend line, even though it was violated, could serve as resistance. I also wrote that a horizontal line drawn back to the early 80s showed this area as polarity.

I said if it got back to .8860 I’d watch price behavior and might short. The closest it got was .8833. I, however, was distracted by other tasks and didn’t get in until .8746. Shorting at this level meant my stop had to be wider than I normally prefer above the prior high. But I felt confident, after so much prior uncertainty, that the pair would drop further. Another thing—the average true range (ATR) on this pair is about 115 pips. That impacts where one can set one’s stop. In any case I have a better than breakeven stop on now. I can’t lose money.

How did I reach confidence? Certainly the aforementioned trend line and the history around the price level. Another reason is the ongoing divergence between price and RSI on the daily chart. One would think that if this was the start of a new upswing in the pair that it could have resolved the divergence by now.

A look at the 3-hour chart at the top of this post shows a few things:

1) The candles near the high showed upper wicks. Combined with resistance this signals at least uncertainty and possibly a weakening market.
2) After .8860, the market showed lower highs and lower lows. So now it’s going to head sideways again? This pair is like an unconditioned hiker. Every 20 feet up the mountain it has to stop and catch its breath; slug a drink of water.
3) Is that a possible head and shoulders (H&S)? This is speculative at this point (as if the whole business of trading isn’t, LOL). It could also drop and then rise again to form a less scrunchy, right shoulder. If this does prove to be an H&S its neckline is .8587. But we don’t know yet. We won’t know it until the neckline breaks. If it is the potential price objective is .8314. This is more than believable as it’s roughly support from earlier moves. It’s also a key level if you analyze past highs and lows in the pair’s history.
4) If we’re pattern hunting, there’s more. This could be a triangle. If it’s an Elliott wave triangle, one expects it to break upward. If it’s an ascending triangle, one would still expect it to break upward. In either case it could touch its bottom line again. By the way, the bottom line is not perfectly horizontal. If it was sloping downward a bit more it could be construed as an orthodox broadening pattern. If this happened, it’s deadly after an up trend.

I wrote yesterday that my preferred count in Elliott Wave (EW) speak is that this is a primary wave two correction. These can be dynamic and often retrace a good part of wave one. At .8860 (assuming this is the high) it retraced 89% of the first wave down. 89—a Fibonacci number. Isn’t that interesting!

So what is this pair up to? It’s at minor support now so it may bounce. It may drop further. Or it may not. Look, all this is in the future—“none of this has happened yet,” as the Boss sings on Livin’ in the Future on his Magic CD. There is nobody that can predict this. But if commodities drop, the related commodity currencies could have a nice fall.

One last note—assume for the moment the validity for the moment of the H&S interpretation. If it is then it needs to break the neckline at .8587. If it doesn’t it isn’t one or it’s a failed H&S. These can be very powerful signals as well. More important, that’s a level that I wrote yesterday I should have gone long.

GBPUSD

The original short trade is still on, currently showing 222 pips with a profit stop in place. Yesterday morning I took on another short which stopped at break even. I sold again and that short is now at 98 pips profit. I may close that one in a few moments. As I wrote yesterday, I’m watching short term charts. It did break the short term uptrend line I wrote about. But even if this is the beginning of a big drop in the pound, don’t expect it to give up without a fight.

Other Trades

I’m still long the USDCHF. The pair is lingering and maundering not quite at the top of its channel. I’m long the USDCAD from 1.0762 with the stop at profit. I’m short the EUR/JPY which is slightly in profit.

It’s been a good week—lots of opportunity in the market.

None of the above are trade recommendations. 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.