I haven’t looked at this pair in a while so let’s see what’s going on with the longer-term picture.
The weekly chart still supports an EW count of a second wave having completed at .9406 in November. If this is true (and no EW count can be proven as true until after the fact unfortunately) then we’re in the beginning of a third wave down. As Prechter and Frost say in their book, Elliott Wave Principle: Key To Market Behavior, EW practitioners live for third waves because “third waves are wonders to behold. They are strong and broad….[and]…usually generate the greatest volume and price movement.”
What I marked as the second wave, retraced much of wave one and with the strong upward movement convinced many that there is nowhere to go but up. This is typical for second waves. It also divided into a flat with its 3-3-5 count and was an expanded flat since C completed so far beyond A. To prove it wasn’t a second wave requires for it to push above .9851 so there’s a ways to go and it’s not a very enticing short if that’s all we had to go buy.
For the last eight weeks, the pair has been in a downward channel, forming what looks like a bullish flag. but its current price puts it at .618 retracement of the latest down move. Here a short looks more attractive since it’s at the top of this channel and the stop can be tight.
One concern I have from the weekly chart is that RSI is not falling very much. As Connie Brown wrote in her book, Technical Analysis for the Trading Professional, an asset that is still in a bull market won’t drop below certain levels, usually 40-50, in the oscillator. That’s what this pair is doing—not dropping too far. There is a lot of bullish sentiment for the AUDUSD. Australia is in a good position to take advantage of any continuing growth in the Pacific region since it’s rich in commodities. Their central bank has also raised its interest rate twice in recent months.
Any short here would have to have a stop above .9100 and I’d probably go above .9150 because the stock market looks like it’s going to have an optimistic start to the year so risk aversion will be down. To go long, I’d wait for a definitive break above the current channel.
Here’s the weekly chart:
© Dianne Fecteau, 2010. 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.
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