Wednesday, December 2, 2009

AUDUSD—A reader’s question

A reader emailed me that he had tried to comment but the comment did not appear. First, thank you for reading and thanks for trying to comment. My blog settings are set so that anyone can comment. In order to comment, it seems you must 1) click on comments below the blog post you wish to comment upon, 2) write your comment in the box that appears, and 3) click on the Post Comments button. You may also have to select from the profile box where you can select anonymous or Google account or whatever. I hope this works because I would welcome more comments.

In any case, the question was about the AUDUSD and this reader wrote last night, “Now after today, I am wondering if it will take out the recent 0.94047 Hi on 11/16. Or is it about to go down as H1 chart shows divergence, plus the daily has given a head and shoulder type top (do you see it as a "failed H&S?).”

On the daily chart, I’ve marked the head and shoulder pattern (H&S). You usually see this pattern at a top but it can also occur during a consolidation. If it forms during a consolidation, it often fails. The reason the reader asks if this one has failed, is that the pattern is confirmed when price dips below its neckline. In this case, the up-sloping neckline (which I drew in blue) was at .9141. Price dipped below (as well as below the daily uptrend line) but quickly returned, dipped below again and has now returned to the extended neckline. My opinion is that it’s not possible to definitively say if it has failed. because it had a nice close (the black real body of the candle) below the neckline and the candles since have been indecisive. Always remember that topping (and bottoming) is a process. It doesn’t occur in one great burst of a candle (usually) but takes its time, wandering and meandering along until you just want to shout, “Get it over with, already!” Alas, the market’s time line is not our time line. A successful trader is patient.

Tom Bulkowski in his book, Encyclopedia of Chart Patterns, writes that pullbacks happen in H&S formations between ½ and 2/3 of the time. So this pullback is not alarming although yesterday’s candle is definitely bullish and the lower shadow of the candle before that marked a nice little support level.

Will it take out the November high? Well it that happens then we know the H&S failed for sure, right? A failed H&S is also a powerful signal. Given the strength of the trend to date in AUDUSD, higher highs could be coming. I still have a potential price target of 97 from some point and figure calculations. But before anyone starts piling on longs and stacking up their deposit slips, it’s important to remember this is a mature trend at a severe angle on the monthly chart (see yesterday’s post). We need a definitive breakout to buy.

RSI on the daily chart causes me concern about buying willy-nilly as well. It needs to climb well above the down-sloping line.

This reader is smart to be looking at multiple time frames so let’s drop to the hourly chart. I don’t really see divergence here but what I do see is that RSI has dipped below the RSI trend line. If price should follow and close below its trend line at .9233, things could get interesting. Below .9106 (the last dip low) would also be telling. Breaking upward with a close above the narrow band it has been trading in for the last 24 hours (.9300) would hint at more potential upside movement.

The real question is, let’s face it, should one go short or long here. The real answer requires waiting a bit longer to see what price action does. The candles with their small bodies and upper and lower shadows are indecisive. Be patient until better clues are available. .

Here are the daily and hourly charts:

© 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.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.

No comments:

Post a Comment