AUDUSD—Monthly analysis

RBA did the Australian dollar the favor of another rate hike last night so what’s with the tepid response? Of course, last month the initial response to the rate hike was tepid as well. Well, I’m not going to trouble myself with fundamentals since they often don’t help with intraday trading (besides causing knee jerk reactions that are usually quickly retraced once they’ve taken out the trader’s stops).

Last night, I ran my monthly charts. Looking at AUDUSD, you can see that it has almost entirely retraced its fall from the ’08 highs of .9851, reaching a high of .9402 just this past week. In the process, it blew past all manner of Fib retracements and prior resistance levels. You go, girl, as they say, although I actually don’t know any of the vague, inchoate they who actually say that but I live a very cloistered life what with my charts and all.

Anyway, a very impressive performance during the last ten months. That’s right, ten. Let’s drop the Elliott Wave (EW) talk about wave two corrections (although this won’t not be proven that until it bubbles on up above .9851) and talk Dow Theory for a moment which has, I think, much to say about macro trend movements. Dow Theory talks about three trends—the primary one, a secondary or intermediate one, and a minor one. The primary one lasts one to several years, the secondary one lasts three weeks to three months and can retrace 33 to 66% of the primary gain, and the minor trends last a few weeks.

AUDUSD was in an uptrend from 4/2001 (at a low of .4775) until 2/2004 with a high of .8010. It then corrected for three months, reaching a low of .6774. Sounds like an intermediate correction of three months that retraced 38% of the overall uptrend. For nine months, it headed up to .7991. Following this it dropped back to .7015 over the course of 11 months (That’s a long correction but did anyone tell AUDUSD about Dow Theory?) This entire, almost two-year move, looks eerily like a, dare I say it, EW zigzag correction. Wait! Dow Theory states that secondary corrections often follow a three-wave structure. Who got what from whom?

The pair then began to climb in earnest, with one minor correction, to 7/2008. One would have to say this was an overall uptrend despite the long corrective period that lasted almost two years, well beyond the Dow Theory standard of three months. In 7/2008 it plunged, dropping to .6007 in four months. I guess it wanted to get the 75% retracement of the overall uptrend from 4/2001 done with! During this plunge, it violated a serious trend line that it has since regained. It has also retraced, over 10 months, over 90% of that fall.

So what’s the overall, primary trend? One, groaningly, still can’t definitively say. If you try to say up, you have to confront the fact that the plunge from 2008 went well below the prior correction. This is a lower low. When you have a lower low, you no longer have an uptrend. It also violated old tops and all the rest of that stuff. Yet, if you say that’s it, kiddos, it’s down, you’re assuming the current rally isn’t going above the .9851. If it does, all will be forgiven, she just got a little tipsy and let her petticoat slip down below her dress, and, oh, never mind. You go, girl, and all that. Alas, there’s no proof of that yet, either. What am I thinking? I blush to think anyone would care but I’m thinking rally in a primary trend that has changed direction based on some other things I look at. I won’t bore you with what.

Unbelievably, I do this monthly analysis on each chart but of course, I won’t post them all. I usually just jot these thoughts on the chart itself in cryptic little notes. I suggest that even intraday traders pull back and do this once in a while. It gives you a great perspective.

Note, on the monthly chart below, the long upward shadows of the last two monthly candles. They’re different from the prior candles in that regard. Also, note RSI. A long divergence (but this is a great example of why you don’t trade divergence in and of itself—you’d go broke waiting for it to pay off. You have to combine this kind of thing with specific techniques in shorter periods). Note, too, the steepness of the uptrend line. The steeper they are, the less sustainable.

Let’s go back to EW theory for a moment and say the big move down was a wave four correction that ended at .6007. Then we’d be in a wave five and it could go above .9851, the wave three high. It could break parity! Long, long, let’s go long! Hold on. First, it’s been underway a while now. Second, one of the three inviolate rules of EW theory is that wave three can’t be the shortest. It doesn’t have to be the longest but it can’t be the shortest. So that would mean that this wave five, if that’s what it was, could not be more than 2,836 pips (the distance from .7015 to .9851). Wave one (under this hypothesis) would have been 3,235 pips from .4775 to .8010. Add 2,836 to the .6007 low and you get .8843. No, it can’t be wave five. The most logical EW count on a monthly chart is a correction. I’ve labeled it as such on the monthly chart below and that is what I’m sticking with for now.

If I think the primary trend has reversed though, why wouldn’t this be a wave two? It could be, but what difference does it make? The next major move would be down, regardless. The point, though, of this monthly analysis is to provide some perspective. For me, that’s what it has done and I hope it has done so for any readers I may have who haven’t yet dozed off with this treatise.

Here’s the chart:



© 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.