Monday morning in the Ozzie

Last week I wrote that I shorted the AUD/USD at .8738. I’m still short. After hitting a low this morning of .8587 it’s back up a bit. Currently I’m at 94 pips profit as I write this. I’ve moved my stop to keep 20 of those pips. I may move it closer depending on how the pair behaves in the next hour or so. It’s well back into the consolidation range I wrote about extensively in the past couple of weeks. 45°

Here’s my one-hour, three box point and figure (P&F) chart. Notice the simple triple top it broke on its ascent. It could head back to that level before it resumes its climb. That would make a nice profit target of .8480 to .8520. What’s important to remember is that the pair remains technically in an overall uptrend that began in March. If the pair violates the trend lines I’ll be happier being short in this pair (actually very happy). But until that happens, I’m thinking reaction in an uptrend. That doesn’t mean you can’t make money from going counter to the trend. It does mean you have to be alert and not get all gaga over the trade. Now that I think about it, never get all gaga over a trade.

As always, this isn't a trading recommendation in any way. Trading Forex, or anything I guess, involves substantial risk and is not for the faint of heart.

© Dianne Fecteau, 2009. 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.

AUD/USD

Last Thursday I went long the AUD/USD at .8586. I moved my stop Friday to .8596 and was taken out last night during the Asian session at that price. I just went long again at .8570 so I’m in at a slightly better price than the last trade. Had I not been mucking about with the Euro charts for so long or not gone for a cup of coffee I might have noticed when it hit the near bottom of the range but there you go.

One thing I won’t do in this blog is hypothesize about possible trades. Lots of people put out a lot of analysis that has nothing to do with whether or not they’re really trading. Jessie Livermore tells the story of a guy who was going to fight a dual the next day (Reminiscences of a Stock Operator, page 27).

His second asked him, “Are you a good shot?”
Well, said the dualist, “I can snap the stem of a wineglass at twenty paces,” and he looked modest.
“That’s all very well,” said the unimpressed second. “But can you snap the stem of the wineglass while the wineglass is pointing a loaded pistol straight at your heart?”

Like Jessie, I need to back my opinions with my money.

Looking at the three hour chart, there’s a range of .8543 to .8676. Another thing that struck me on the chart was the beautiful symmetry of the moves back in August. From there it moved out of its triangle and is currently in a consolidation range. It’s showing some symmetry here as well.

Notice that it’s well above the .618 retracement of the July to October ’08 move down. And, as I wrote last week, this .8500 area is significant historically, all the way back to the 1980s. My Gann calculations on different highs and lows also show the significance of this area. It has also cleared the .8524 high from back in September ‘08. Why do I consider that high significant? Because it was the last high before the egregious move down. So if it can get above its current range high of 8676 it might have some significant moves ahead. If it breaks below, it will also be significant.

With a trading range such as this, also known as a rectangle, box, or horizontal channel, the price must touch the support and resistance lines at least twice. Edwards and Magee, in their classic work Technical Analysis of Stock Trends, believed ranges were most often continuation patterns. It’s also worth noting that there are many false and premature breakouts (Encyclopedia of Chart Patterns, Bulkowski, 2000). Regardless, the pair will exit this range eventually. Even if you just trade support and resistance though, it’s a wide enough rectangle that you could pick up 70 to 100 pips with tight stops. However I’m hoping to not have that kind of trade because both the upside and downside on a breakout offers much more potential profit.

Another thing I like about the pair on this chart is that RSI isn’t falling too far on the reactions. That’s a bullish sign. I use RSI primarily for divergences and for such things as this and not usually for buy or sell signals depending on overbought or oversold levels. There is one concern here, though, in that the RSI is showing momentum is falling off so there is some divergence.

As usual, I’ll just have to continue to study price action. And of course I have a tight stop since I entered near the bottom of the range.

None of the above is a trade recommendation of course. Remember that trading involves substantial risk.

© Dianne Fecteau, 2009. 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.

Waiting for Entries

What will the Euro do this coming week? It doesn’t take much in the way of technical analysis to see that the pair is in an uptrend. Then there was the strong move up this past week—it started the week at 1.4295 and ended it at 1.4570 (the high for the week was 1.4635). Sentiment is bullish, judging by the news reports (see the word cloud from the last post). Even if you believe that this is a primary wave correction (Elliott wave speak), there’s little doubt, it seems, it could go higher, possibly up to 1.48 or so. But as I said in my last post it’s not moving right now. If you want to go long you’d have to wait for a reasonable entry point. So two questions:

1) If you were going to go long where is a reasonable entry point?
2) What do you do while you wait for it to get to that point? That’s the forbearance part I mentioned last time.

The first question is easy. Depending on your approach you can answer it a number of ways. I could use my 3 hour P&F chart I posted last time and hope for a retracement back to 1.4420/45. The pair closed Friday at 1.4570; its daily average true range (ATR) is 129. So that wouldn’t be such a stretch. Or I could use Fib levels, which would also bring me in at 1.4410/55. Finally, I could wait for something with more upside potential such as letting price come back to an uptrend line drawn from May which also coincides roughly with the 50 EMA on the daily chart. That would mean I’d enter around 1.4225/75. That would probably require waiting a few days at least. (Note that if I did take that approach, I’d want to carefully assess market conditions when it reached that point). Or I could wait for it to break out of some major resistance levels which would involve the highs in late 2008.

Why not just go long now if you think the Euro is bullish? Jessie Livermore answered it best when he wrote, “In a narrow market when prices are not getting anywhere to speak of but move within a narrow range, there is no sense trying to anticipate what the next big movement is going to be—up or down. The thing to do is to watch the market…and make up your mind that you will not take an interest until the price breaks through in either direction.” (Reminiscences of a Stock Operator, 1993)

Regardless of approach, what do you do while you’re waiting for your entry? If you think a market is going up you can fall into being fearful that you’ll lose out. This can make you jump in when the market is at a top. One answer is distraction. This can be as simple as putting on your headphones and listening to some music or doing the analysis on another pair. Or focus on how much you can lose if you’re wrong. Actually write down the numbers or plug them into Excel. Read them out loud to yourself. Traders often trade from the silence of their inner thoughts or with the babble of financial news in the background. Hearing your voice speak the results of an analysis, especially if it involves potential loss, can be effective in combating the urge to just put on a trade.

Relaxation anchoring is another technique. You do this by practicing progressive relaxation and then, when deeply relaxed, breathe in with the phrase, “I am relaxed,” and exhale with the phrase, “I am calm.” Each time you say the word “relaxed” squeeze your right thumb. If you practice this a few times it will only take squeezing your right thumb to bring on a more relaxed state during your normal activities. You can also anchor to a pleasant experience. I’ll include some audio links sometime in the future with both these approaches. Email me at dianne@feldyusa.com or post a comment with your email if you want to be on a list to receive them.

None of the above is a trade recommendation—in fact I’m short the Euro right now but that’s not a trade recommendation either.

© Dianne Fecteau, 2009. 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.