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AUD/USD: Oversold Bounce to Be Capped by Parity Ceiling

Last updated 6/12/2012 1:37 PM EST (GMT -5) 6 Comments

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Matthew Weller

Technical Analyst, GFT

Follow @MWellerFX

After a relentless trend lower throughout May, we finally saw the long-anticipated oversold bounce in risk currencies against safe havens such as the U.S. Dollar and Japanese Yen last week. The AUD/USD was among the currencies that bounced, but so far the pair has been unable to eclipse key psychological resistance at parity (1.00).

The 1.00 level is widely watched, not just by the trading community, but by the world as a whole because it indicates which currency is perceived as stronger. Traders have realized that a certain amount of national pride, or “bragging rights,” depends on where the AUD/USD trades relative to parity, making this area a reliable area of support and resistance. Therefore, any bounces that emerge from current levels are likely to stall ahead of 1.00.

Zooming in to the 1hr chart provides a more granular look at the recent price action. As the chart below shows, yesterday’s drop from the recent highs was impulsive in nature, with uniformly red candles and a quick drop in a short period of time. On the other hand, since bottoming near the weekly pivot about 24 hours ago, the ensuing bounce has been much more corrective in nature, with a more balanced interspersion of green and red candles. Basically, this indicates that the recent move higher is not as more timid and less likely to be sustained than Monday’s drop.

To take advantage of a reversal back lower ahead of parity, traders could set a limit sell order at .9962 (near previous support/resistance from yesterday) with a stop at 1.0012 (above the weekly high at key parity resistance) and a target at .9860 (above the week’s low and weekly pivot point at .9848). This trade would be invalidated if not triggered in the next 48 hours, or by a drop down to .9860 prior to entry.

Potential Strategy: Sell if AUD/USD bounces to .9962, stop at 1.0012, target at .9860.

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Comments (6)

Darkdoji

June 12, 2012 at 09:22 PM ET

Been tracking this pair forever and your call is (to my mind) spot on and Just In Time. The unit hit a diagonal Sunday on a "gap" up. And like you say is stalled and looking like in a turn.

Lets hope it turns out just right.

Cheers

Rubel

June 13, 2012 at 01:14 AM ET

Dear Darkdoji,
How are you doing? Everythin's fine I hope. Enjoy trading.

PS could you please recommend me some reading on the bounded model so that when you finish your own study on it, we can talk more effectively? But once again, if you think its gonna hurt your time, no need to go for it.

Thanking
Rubel.

Darkdoji

June 13, 2012 at 04:23 AM ET

Hi Rubel, life in trade remains positive as I am making good progress. You did not get my hint the last time - no stock of reading material - just google the topic and scour the net (in the sense of separating the rubbish from the useful bits of data you find). In my hurry I read all sorts, once I find a principle or an application that suits me I am done.

No memory of exact locations as there will be many (most of them useless or unsuitable to my purposes or intellectually inaccessible). Like right now I am in the final phase of implementing polynomials (with monomial dependencies) in regression analysis to back my filters and provide greater comfort for my arrogant style and nothing else must distract me till I am done (I refuse the peanuts on offer from conventional wisdom in this business).

But Rubel notice how the Euro (as a unit - not this or that time frame) hit the underside of the diagonal it broke last month and witness its apparent reversal (ongoing) back to a bear market. QE3 or something as fundamental to flow structure as that may turn it back up (but I doubt it). Especially interesting are the flow of impulses from left to right in response to an event at the rightmost extreme of the feed. Notice also how (despite the extreme volatility so far associated with that event) the pivot stack has reordered to its most bearish (m,w,d ) configuration to back comfort in the view that we are going down (sign of the flow has changed). See how much simpler the analysis becomes compared to the classical approach and or other complex technicals. Notice also how early you can be with fractal geometry based approach.

But most important is the psychological tuning to ignore the news and headlines - they are a major distraction and of little value to predicting the trend. Indeed, empirical studies show order flow to explain price movement 7 out of 10 times and fundamentals 0 times in the normal time spans useful to profitable trades. Pretty interesting - but I am still learning and noting all aspects as I have no experience in years, just days.

Takre

PS: I expect the AUD to follow the same path as it was subject to the same underside impact on return line on "gap" up Sunday, though retesting the level at this time.

Rubel

June 13, 2012 at 12:02 PM ET

Hello Darkdoji,

You have been very kind answering all my questions. That's been very wonderful and very preciously, extremely helpful. Just wondering if you have the time to let me know the exact topic I should look for on the web and what you meant by the pivot stack permutations - that is when you say M, W, D is the most bearish base, do you mean only pivots of Monthly < Weekly < Daily and not the S/Rs-s associated with those pivots? Just wondering if you could answer.

On a different note, I do completely agree that the news has a little effect on profitable trades and I hate trading on news. That makes me more interested following your method since in one of your threads you advised to ignore it. That was like a blessing to me and I immediately registered at this forum just to talk to and learn from you.

Wish you a happy trading my friend.

Rubel.

Darkdoji

June 13, 2012 at 02:01 PM ET

Hi Rubel, now you got me lost in translation. I thought you wanted to know about bounded models - well there is nothing like that per se in some book or written up script. However, if you consider the idea of mean reversion a reasonable device for trading the market then implementing a bounded model simply means finding the mean value which assures price containment (within the standard volatility band tool) to the point where you feel comfortable to act on the basic cues that result. That would be your bounded model. What topics to look for ? Any and all that help your understanding in implementing that simple idea. If you refer to my initial (more detailed response) it outlines the steps or course I followed - you can do the same or map yours out on an emergent basis (which was what happened with me).

Pivots are like promises - to be kept or broken. So one is always watching out for whether we have a breakout or a bounce to trade direction. That does not change. However, ignoring the fact of pivots and watching the arrangement of the lines that represent them on charts (their point extensions) suggests to me the relative balance of signed flows per period. Because these change with price movement they can (to my mind) be used to inform the next trade - I use them basically as filters.

For instance, in their current arrangement with regard to the Euro - they suggest a sell off and act as a filter for price moves down. Do they predict the course of price? Yes but only if you can calculate out of their relative ratios a favorable elasticity. To do that you need for price to move in direction and where it does not it must of need reverse and reorder the stack - implying you start all over again to assess events. For example, I do not know that on retest from the underside of the diagonal I mentioned - the unit will not breakout north so I watch and wait based on my calculations and findings which are not available to you. To make them available simply find out this "in how many ways can three items in set be arranged?" Next observe what these mean in terms of direction and momentum, etc and you have your permutations.

The news and eco releases are most useful to analysis of what and why an event occurred but most useless to predicting a trend. That is the view I have formed based on my experience. Many traders make a lot of money simply trading the news. I can't as I do not have that temperament. Instead, I like to follow trends - and here they are of little help to me. So today, retail sales was off and risk rallied ostensibly because it tells something of the probability of more stimulus in the future, etc. But does it tell me to keep going north or to keep going south? I do not care and use alternative means to determine that. This is what I mean my ignoring the news. I know a guy here who trades the Yen based on what he calls fundamentals and does very well. To him news and eco releases make sense. But more profoundly empirical studies i have read agree with my experience that the news and eco releases are zero predictors of price.

Further, and I cannot repeat this enough. I do not have a method - I am trying to forge one based on all that I am putting together. I came to this site in search and found a) excellent research b) exceptional technical analysis both in terms of the harmonic method and the "classical" approach c) lucid fundamental explanations of news and eco events and d) a lot of e-books that are informative as well. Now the pros here I assume would be great help to anyone seeking guidance in trading. I simply do not have the temperament for these more traditional methods and I am trying to find my way alternatively. I do not however reject those approaches. So may be that is where to start (if you are just starting) and make up your mind as you go. Without the clarity I gained here on how to trade the methods and how best to make market assessments based on them, II could not have found out why I am not suited to those types of trading - statics I call them. I am disturbed you want to follow me - I do not think it will pay you as I am neither successful yet nor established - just determined to become. I would not encourage that at this point and will become a distraction for me beyond this point.

Rubel

June 13, 2012 at 10:25 PM ET

Thank you so much.........Darkdoji.

Rubel

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About The Author

Matthew Weller has been actively trading the various financial instruments including stocks, options, and forex since 2005. From his first exposure to forex, Matt was fascinated by the vast liquidity and volatility offered 24 hours a day in the forex market. He has specialised in currency trading ever since.

Matthew focuses on candlestick patterns and pivot points to identify logical trade entries and exits. In addition, he has discovered a passion for teaching others about trading and has conducted over 400 educational webinars on different aspects of trading the forex market. His analysis has been quoted in Reuters, MarketWatch, and on the NASDAQ newswires.