AUDUSD—No Humpty-Dumpty

The pair reached a low of .8956 in early morning trading. This compares to the early November low of .8916. The next supports are .8860/87 and then .8750/75. One can’t help but wonder if it’s going to head a bit lower.

It’s important to remember that the pair has been strongly bullish since the late 2008 low of .6007. If the trend is reversing, tbe pair won’t simply topple off the wall, Humpty-Dumpty style, in one great fall. Topping and bottoming are events. Detecting trend reversals is painful at best—all those shorts that stop out on bearish traders—and all around futile behavior at worst—the market can outlast you and all your best-laid plans.

What are the signs it’s weakening and a reversal might be in the cards?

1)Almost ten weeks of sideways behavior that looks as though it’s forming a broadening top
2)Break below the upward trend line on the weekly chart
3)Falling momentum on weekly and daily charts

Now those are all excellent signals. They’re also on weekly and daily charts. In shorter time periods there are going to be many ebbs and flows. Then, of course, you have the ongoing bullish sentiment which means some traders expect the pair to continue to rise, buoyed ever upward by the rotten, despicable state of the USD and glinting commodity prices. The availability heuristic is ever present.

A look at the three-hour chart shows the pair rising off support a bit since its early morning low. One could try a long trade here but I’d keep it very small. The justification is that the pair is near support which means the stop can be tight. In addition, the candle that’s currently forming looks bullish. One concern is the candles are throwing off some upper shadows. Resistance is at .9082, .9129 (short-term downward trend line), .9170, and the downward trend line at .9250.

I’m going to sit this one out. One reason is that I’m looking for rallies to short. Second, I’m winding down my trading for the year. Another reason is the thinning liquidity in the markets as we move closer to the holiday. It’s a good time to stay out if you can bring yourself to do so. You can’t do that, you say? You gotta trade? Then it’s a very good time to work on mental attitude—the best traders learn discipline.

Here’s the three-hour 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.