AUDUSD—Reaction

AUDUSD has dropped, reaching a low of 1.0056 upon which it formed a hammer on the three-hour chart below. This is between the two support levels I blogged about yesterday (1.0183 and .9982 where the latter is .382 of the move from .9537 to 1.0257). Reaching this low also meant the pair dipped below the 10-day SMA of 1.0106. There is a slight seasonal tendency to drop during January (17 down Januarys out of 29 since 1982).

So is this a pullback where one should begin to think about buying in anticipation of the pair reaching various price targets ranging from 1.0307 to 1.0640? (See yesterday's blog for those targets). Or is it the beginning of a more pronounced move down?

Nobody knows for sure. One way to attempt an answer is to examine the current low more closely. Another is to see if there are any buy signals forming on shorter-term charts.

The current low is at polarity (previous highs and lows) as a look to the left of the chart shows. This strengthens the price as support and makes the hammer more meaningful. Therefore, a break below 1.0056 would hint at further lows. It is only a three-hour chart—it says nothing about what it will do tomorrow or the next day necessarily—but it's a clue.

Notice that instead of a buy signal on the three-hour chart, there is negative divergence and that the pair is not oversold. On the one-hour chart (not shown) it was oversold and has bounced above it. This can sometimes be considered a buy signal when a pair has been in a strong uptrend but I'd prefer to see another test of the 1.0056 to go along with this. Note also on the three-hour chart that the price has broken below an uptrend line. RSI has too. In addition, the RSI level is lower than it has been. This is not the same as divergence in that it hints that momentum for downward movement is stronger than it has been in the recent past. Finally, combine all this with the fact that the 1.0257 high occurred in an illiquid holiday market when price extremes are common. I would be hesitant to jump in here with a buy. A little more wait and see is called for. Below 1.0056 lies a cluster of price and fib support around .9982. I'll look for a buy signal there. If none is forthcoming, then there may be additional lows in store, potentially down to .9570 although that seems unlikely at the moment.

Here's the three-hour 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.