Monday, April 25, 2011

AUDUSD—comparison of two up trends

On the monthly chart, a comparison of two up trends is interesting as to time and price.

The current ascent began with the 10/2008 low of .6007 to the recent high of 1.0778. This was 4,771 pips over a period of 31 months. The ascent that began with the 4/2001 low of .4775 to the 7/2008 high of .9851, totaled 5,076 pips over a period of 88 months. The gains from 2008 have been 94% of those in the prior uptrend but in only 35% of the time. Has price gotten ahead of time?

Momentum, as measured by RSI, is also more gradual in the current up trend. Even with the meteoric rise the Aussie has been experiencing, RSI is not "overbought" (over 70). Nor has it achieved its prior highs—negative divergence with price. If ever there was a good example of how one cannot trade divergence by itself, this is it.

Look closer at the divergence though. Connie Brown, writing in Technical Analysis for the Trading Professional, discusses a positive or negative reversal, a hidden divergence. For example, I wrote the words positive reversal below the down slanting red line under RSI between 2003 and 2006. She describes this as the market building internal strength—price is higher but there is a new oscillator low. She provides a method of calculating price moves from these and, in this case, her method resulted in a price target of .9473, quite a bit lower than the .9851 high but arguably higher than one might have otherwise calculated at that point in time, especially if one let oneself be blinded by the negative divergence.

Another interesting characteristic of the chart is the AB=CD comparison. In the former uptrend, AB (4775/8010) was 3,235 pips. CD (6774/9851) was 3,077 pips. Close enough. In the current uptrend, AB (6007/9408) is 3,401 pips. If CD is equal to that, then the price target for CD is 1.1467. Far-fetched? Perhaps. If the pair made it to the top of the upward sloping rectangle, that would be about 1.15. I also have a daily point and figure target of 1.14.

As I wrote last week, that the Commitment of Traders report is near an extreme of non-commercial longs to shorts. Extremes are not a good thing. However, you cannot trade that either. Even if the Aussie suffered a sharp correction, the overall trend from .4775 is up with two touches of the trend line.

Resistance is between 1.0750 and 1.0830, then 1.0900. Support is at 1.0583. Additional support is at 1.0444, 1.0390, 1.0289, 1.0248 and 1.0205.

For those who trade on shorter periods than the monthly chart, there are many opportunities to buy and sell but buying pullbacks has obviously been a good strategy for the last several years.

Here's the monthly chart.

© Dianne Fecteau, 2011. 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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