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AUD/NZD Sell Off Bearish Trend Line, Take 2

Last updated 6/18/2012 1:37 PM EST (GMT -5) 2 Comments

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Matthew Weller

Technical Analyst, GFT

Follow @MWellerFX

On Thursday, we outlined an opportunity to take advantage of the clearly established AUD/NZD downtrend if rates bounced (see “ AUD/NZD: Clear Trend Trade Far from European Turmoil” ). Unfortunately, the pair never quite reached the entry, and the trade was invalidated in advance of this weekend’s event risk.

However, the bearish thesis still applies: the downtrend line remains a strong level of resistance, and with rates inching below key daily support, a quick move lower is likely. There is also a highly-anticipated Federal Reserve meeting / statement on Wednesday that is likely to lead to further volatility. The daily chart below shows that rates have now pierced critical converging support at 1.2770, opening the door for further drops this week:

Meanwhile, the bearish trend line has continued to guide rates lower and should cap any short-term bounces that emerge. With previous horizontal resistance at the 1.2800 round handle from Thursday and Friday of last week, rates are now within about 20 pips of a strong selling opportunity.

Specifically, traders could set a limit sell order at 1.2795 (under bearish trend line resistance and 1.2800 round handle) with a stop at 1.2830 (above bearish trend line resistance) and a target at 1.2740 (above the weekly low and the daily 61.8% Fibonacci retracement). This trade would be invalidated if not triggered in the next 24 hours.

Potential Strategy: Sell if AUD/NZD bounces to 1.2795, stop at 1.2830, target at 1.2740.

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Comments (2)

Darkdoji

June 19, 2012 at 08:10 AM ET

I have just entered an interest in this movement by a sell stop order @ 1.27555 with a stop @ 1.27750 and TP @ 1.27322. This pair has been a challenge for me to trade for some time because of its seemingly erratic behavior which until now was difficult for me to read and verify even with guidance from experts like you. But I have since replaced Volatility Bands with polynomial regression channels in my approach which device makes it far easier to find price along its true vector. I strongly recommend polynomial regression based models of the market to anyone seeking to better read trends and wave patterns. They represent an incredible improvement at least compared to 1st and 2nd power regression models and VB tools such as Bollinger Bands - for the same data set.

Regardless, this pair might be pretty choppy just now (and hence my make or break stop). The problem is that the unit's primitive footprint is primarily bullish and of the form B > C > A and with just the current bar in reactive retreat on the unitary scale. Therefore, in my estimation a strong potential for a "sudden" bounce near term (i.e. the motive forces within the flow remain very strong even in the currently bearish stream) - hence my less than confident TP @. 1.27322 (not much of distance as I remain jumpy about the state of play that is unsure if in fact the current low is not the bounce). The polynomial framework however, indicates further downside along a bearish vector for the pair (so will adjust TP if immediate follow through becomes manifest and assuming my trade is triggered). But if 1.27322 is breached the polynomial framework points to 1.26254 as target and this is where good polynomial implementations can be priceless for riding trends.

Nevertheless, implementing the polynomial model has led me into defining and analyzing flows in terms of the modern wave matrix. Which by far appears more productive than by S/R. This means I still question harmonics as requiring degrees of symmetry (in both dimensions of price and time) that are unrealistic and to my mind spurious since the precision required is not demonstrated to ensure outcome from all we know in wave theory. Similarly, while the Elliott Wave principle is a brilliant detailing of the Dow Theory in its time (and in terms of comprehending its fractal structure), actual application of Elliottism is a hit miss venture and time consuming. I personally regard Dow as the first flow master rather than all the others including Gantley who appears to have introduced unnecessarily conservative prerequisites into trading (a bounce is a bounce once a trend is confirmed - what has whether it bounced off of x or y Fibonacci level got to do with that - given we are not attempting to label an Elliotistic fractal).

This tells me that the use of the modern wave matrix along with (most important) acute and relevant flow filters (including the pivot stack) makes the most sense. Anyhow, we wait to see how AUDNZD develops with my hand on the buy trigger should the bounce off of 1.27322 prove to be The Bounce. Best of luck trading.

MWeller

June 19, 2012 at 08:15 AM ET

Thanks for sharing Darkdoji - the one caution to keep in mind with this pair is that the spread is relatively large compared to the daily range, so I generally only look take the strongest trading pportunities.

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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.