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AUD/USD: Buying Pullbacks to Bullish Trend Line

Last updated 2/8/2012 1:23 PM EST (GMT -5) 0 Comments - Add your comment

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Matthew Weller

Technical Analyst, GFT

The Australian dollar has been in a sustained uptrend against the U.S. Dollar since breaking above the long-term ascending triangle pattern (see our discussion of this formation over two weeks ago). As the pattern foreshadowed, the AUD/USD has rallied sharply since breaking out, tacking on over 400 pips.

The recent rally has formed an accelerated trend line, with five successful tests over the past three weeks. Further bolstering the bullish case, the pair broke out to new 6-month highs above 1.0750 late last week. One of the basic tenets of technical analysis is that previous resistance, once broken, becomes future support, this previous resistance level; in this case, traders will closely watch the 1.0750 level to now put a floor under any short-term pullbacks that do emerge.

Zooming in to the 4hr chart, a bearish candlestick pattern suggests that the AUD/USD may pull back to the 1.0750 support level over the next 24 hours. Specifically, a Bearish Engulfing Candle* has formed on the 4hr chart, implying that the sellers may be looking to push the pair down to 1.0750 later today. Given the longer-term bullish trend and strong resistance-turned-support level, such a pullback may present a favorable opportunity to join the uptrend at a discounted price.

To take advantage, traders could set a limit buy order at 1.0755 (just above anticipated support at 1.0750) with a stop at 1.0681 (under this week’s low and bullish trend line support) and a target at 1.0834 (below the 6-month high set earlier today). This trade would be invalidated by a rally above 1.0834 prior to entry or if not triggered in the next 24 hours.

Potential Strategy: Buy if AUD/USD pulls back to 1.0755, stop at 1.0681, target at 1.0834

* A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.

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