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AUD/CAD Hits Triple Top, Ready to Drop...

Last updated 10/27/2009 5:29 PM EST (GMT -5) 3 Comments

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FX360 Technical Analyst Staff

Technical Analyst, GFT

The AUD/CAD has seen a relatively consistent, and rather sharp, rally so far this year so a selling opportunity at this point may seem a bit daunting. However, taking a step back and looking at long-term price action we see that the recent peak near .9840 comes in at previously established major resistance with prices having topped out near this level three times in the past looking back at the last 4-5 years of price action. Prices were first unable to eclipse the .99 barrier back in February of 2005 topping out at.9840, and shortly thereafter re-tested topping out near .9850 at the end of April 2005. After a dropping to low near .8100 in June of 2006, it was not until the end of May 2008 that prices once again tested this key level of resistance, but were unable break through having once again topped out near .9840 towards the beginning of June & July of 2008...

As if this triple-top resistance isn't enough, a bearish 127.2% ABCD extension pattern (where CD is equal to 127.2% of AB) has completed near this major level of resistance adding a bit more confirmation to at least a temporary bearish reversal. Keep in mind that this analysis is based on weekly chart price volatility, so "temporary" is a relative term as this potential correction may last up to several weeks. 

Here's the kicker...although it's tempting to jump in short at current levels prices have already begun to drop falling off the .9840 overnight high and now test near-term bull trendline support. This means we may first see a quick rally to Fibonacci resistance (see 30min chart) before prices take another turn south...

From a risk/reward perspective we'd like to sell off a 61.8% or 78.6% correction, which would come in around the .9800 handle. However, considering the amount of resistance were seeing on the weekly prices may only find 38.2%-50% resistance (near .9770-80) as these levels often provide resistance in strongly trending markets. One way around this would be to scale into this position, for example, with the first short coming in just below 38.2%, then adding onto the short just below 50%, 61.8%, and 78.6%.

Stops would then be set just above the .9840 top (and perhaps just above .9900 to allow some room for a potential whipsaw--a close above .99 would presumably spark a potential strong bullish continuation). Another option would be to monitor intraday timeframes looking for bearish geometric patterns to emerge to more accurately determine/confirm entry and stop-loss. Additionally, a 30min close below .9725 is likely to spark another round of potentially heavy losses. Inital targets to the downside are .9450 and .9200 with long-term targets as low as .8800, .8500, .8180.

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Comments (3)

fishmanszmit

October 28, 2009 at 04:52 PM ET

Hello Roger, I am wondering if you took this trade or not? It has moved down to .9688 and I am not sure about enterring now. I would love to follow this trade down to the mid to low .80's but is it too late? Than ks for all your great articles and recommendations!! Later.

rstojsic

October 28, 2009 at 10:31 PM ET

hi fishman, it's not too late to enter but that decision comes down risk/reward so the question is where are you going to set your stop. Prices recently re-tested resistance near .9740 but were unable to achievea new significant high so that would b e a logical place to pace a stop. Personally, I would rather be patient and look for a solid bearish pattern to emerge on intraday timeframes (6030/15min chart, for example) in order to maximize r/r

weekapaugh

October 28, 2009 at 08:52 PM ET

I got in at 0.9753 and my stop is at break even now.

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