Because the chart said it was the right thing to do and while I'm somewhat distrustful of the late August market with its low liquidity, the chart always rules over personal opinion.
First, as I've written before, AUDUSD doesn't want to give up. Or, to be more precise, the bulls don't want to give up and they're fighting hard, just as the Euro bulls did at one point, to keep price from falling. There are many hints technically that they're going to lose this fight but as to when it will finally roll over for a good long drop down, who knows? The market can outlast you on personal opinion which is why I try to stay focused on my charts.
On the daily chart you could see several reasons for a buy.
There was the daily hammer that appeared 25 August. A hammer by itself after a decline is a clue but this one's lower shadow touched the .382 retracement of the prior move up as well as it being near an upward trend line. So it strengthened the hammer's signal. It signaled strong support. Now had the pair gone on to dip below that price, one would have had a powerful clue to go short. But it didn't. I bought because of this last Thursday. The 26th was a waffling kind of day and my long was taken out for only 30 pips profit before the pair moved on up on Friday. Monday, it fell back and yesterday it dropped a bit more, giving me an entry point. My actual entry point was something I decided on a shorter-term chart.
Another reason for the buy is the RSI level on the daily chart. It doesn't seem to drop very much and on the drop to .8770 it didn't fall below 43.89. This is not a bearish sign even if it's below 50. It's the lower end of what's acceptable—much below 40 and I'd become suspicious—but it is acceptable. Connie Brown writes about looking at RSI levels on pullbacks in her book Technical Analysis for the Trading Professional.
I am though, as I said above, bearish overall on this pair. As I also wrote on Monday, above .9020/30, the bears will probably start selling. That's one of the reasons you see it hesitating here at .9047. As a result, I just took partial profits for +135 pips. I'm not going to close the trade but if I weren't already long I'd try a short (of course you have to have a tight stop as the pair could go higher). I will be watching momentum and price behavior on the shorter time frames. For example, on the hourly chart the pair has just moved into overbought on RSI (over 70) but it has set up a positive divergence. Again, divergences are all over the place so it's not enough to change my mind about getting out of my trade but it's a clue. Again on the hourly chart, the most recently completed candle threw off a longish upper shadow hinting that higher prices are being rejected. And this is at resistance so it's another clue.
A resistance zone exists up to .9082. After that is .9222 and .9364. Support is at .8989/66, .8861 and .8770.
Here's the daily 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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