Thursday, June 17, 2010

AUDUSD—yesterday's behavior; a post-mortem

Yesterday I blogged about the triangle on the short-term chart. What happened after that? As you can see on the chart below, the pair broke below the triangle (label 1 on the chart at .8625), dropped to label 2 on the chart (.8582), rose to label 3 (.8674), and then dropped to .8583 (label 4) in what shaped up to be a rectangle. It broke out above this at label 5 to a high so far this morning of .8674. Here it formed a doji candle known as a gravestone (label 6).

The doji is bearish and the pair has since fallen back a bit although since I captured the picture it is back. This is what the chart looks like in hindsight:

As messy as this looks in hindsight, there is a wealth of information here for the trader. First, the height of the triangle was 43 pips (.8658 - .8615). You could have used this to establish a price target and if you use the price where the pair broke below (label 1 at .8625) and subtract 43 pips you get .8582. This is where the pair stopped exactly at label 2 before reversing. Had you gone short at the moment of breakout (admittedly difficult to do when you're concerned that this may be a fake-out) you would have made 42 pips. That though isn't worth much.

At the bottom of .8582, the pair formed four five-minute candles, each with the same low. This is a sign of basing and the wise trader would have exited (or at least lightened shorts). This caught my interest and I put on another long (which has subsequently stopped at breakeven). One of my original longs profit stopped at +10 pips before it got here; the other (from .8175) is still on.

The pair then returned to the triangle and continued to .8674 at label 3. Most traders would now say the break down had been fake. Some might have bought. However that top formed as a result of a long upper shadow which shows indecision. If you had read my blog yesterday, you would have known I was skeptical that the AUDUSD could continue up with the steep rate of ascent on the daily chart. So I for one, with my somewhat bearish mindset albeit on a pair I'd just taken partial profits on of 455 pips, was not interested in additional longs. The pair then formed a downward rectangle. Where did the price decline stop? At label 4 or .8583. This was one pip away from the first low at label 2. Had I been awake, I would have bought here. I wasn't; I didn't.

Since then it has risen again to.8674, fallen off, and now (not on this chart) is back at it.

Why is this valuable? I now have a range of .8582 to .8674 that the pair is respecting. Both times it has reached the high, it has thrown off an upper shadow that represents indecision. Looking at RSI, I can see that at the first high (label 3), RSI reached 68.03. At label 6, RSI moved higher, over 70. So price is the same and the oscillator is moving higher. This is divergence. It's negative because price hasn't made a new high with the higher oscillator. The final interesting point is that this is resistance in the larger time frame where I identified it yesterday but it's just ahead of even larger resistance at .8707. (Resistance is at .8658/67, .8707/28 (50% of the .92390 to .8067 move, polarity, and a fibonacci calculation of price target based on corrective wave behavior).

On the lower end of the range, there's a hammered out base that the pair respected the second time it returned to .8583. Here, RSI was slightly higher than the first time but was more notable for the positive divergence just before it returned (orange line on RSI and price). This was a big clue the pair would reverse upward but as a I said, I was sleeping.

What we're seeing here is consolidation at best (which you see on the hourly chart below). However, even a clean break above .8674 with no hesitation or divergence on the part of RSI leaves me unable to go long with comfort until the pair breaks the formidable resistance at .8707/28. At that point I can go long. At worst, we're seeing an uptrend breaking down but we won't really know that until the pair closes cleanly below .8582. There's some other information in these short-term movements as well but I'm running out of time so I'll stop here.

I went through all this to show how short term trades can be made within a longer term context but that the longer term analysis comes back to bear on the short term trader. In addition, you can use the short-term patterns and moves either for trading (tricky sometimes) or to refine support and resistance.

In any case, levels are pretty much the same as yesterday. Resistance is at .8674, .8707/28 (50% of the .92390 to .8067 move, polarity, and a fibonacci calculation of price target based on corrective wave behavior), .8800, .8897, .9000, and .9035.

Support is at .8582 (strong), .8551/46, .8495/88, .8426, .8400, .8364/56, .8258, .8195, .8133, .8082 and .8067.

Here’s the hourly 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.

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.

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