Breakout Opportunities for AUD/USD and EUR/USD on Berlusconi’s Decision

Both the AUD/USD and EUR/USD have experienced choppy price action over the past few hours, as was expected ahead of key political moves in Greece and Italy. Following the massive sell-off late early last week on the heels of the former Greek Prime Minister George Papandreou announcing he would seek a referendum on the Greek bailout, markets stabilized once that option was taken off the table and Papandreou was removed from power.

Similarly, as Italian Prime Minister Silvio Berlusconi has fielded calls for him to step down from power markets have consolidated, seeking a breakout in either direction on news of his departure or decision to remain in charged. The charts tell us that this breakout appears poised for a move to the upside should Berlusconi step down from power; a breakout to the downside is ready to play out should Berlusconi retain power.

AUD/USD 30-minute Chart: November 8, 2011

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The likelihood that this trade unfolds in its projected pattern is contingent upon Berlusconi retaining power, which in turn should send equity markets lower.

For the AUD/USD, a contracting triangle has formed on the 30-minute charts. Given the nature of these triangles, a sharp move lower is expected, at least ahead of the Asian session open on Wednesday. As noted in the chart above, the pattern we see here is a contracting triangle. The levels are labeled as such due to the fact that the range bound price action has occurred after a move downward.

In a bear market, which the AUD/USD is in, at least in the short-term, price action will typically occur with lower highs and higher lows. This is evident on the 30-minute chart of the AUD/USD, with points A, C and E occurring in descending order; similarly, points B and D occur in ascending order. As such, given the trend line support, a break below 1.0270 on the completion of Wave E looks to open the floor below 1.0200, perhaps towards parity.

Suggested Strategy: Berlusconi Does Not Step Down

• Entry: Short at 1.0270 [Trend Line Support)
• Stop: Stop to 1.0360 [90-pip Risk]
• Target 1 (Reward/Risk Ratio): 1.0220 (50/90, 0.56)
• Target 2: 1.0081 (189/90, 2.10)
• Target 3: 1.0000 (270/90, 3.00)
• Timeframe: 12-hours

EUR/USD 30-minute Chart: November 8, 2011

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The likelihood that this trade unfolds in its projected pattern is contingent upon Berlusconi stepping down from power, which in turn should send equity markets higher.

For the EUR/USD, an ascending wedge has formed on the 30-minute charts. Given the nature of these triangles, a sharp move higher is expected, at least ahead of the Asian session open on Wednesday. There is something to note, however: because the triangle has formed after a downtrend at the end of October, there is potential that this is a reversal signal. On the other hand, because this triangle has formed near the top of its range since the first week of October, this could be a pause in the move off of the October bottom.

In either case, whether this is going to be a breakout to the upside or a sharp reversal to the downside, the fundamental trigger is in place.

Suggested Strategy: Berlusconi Takes Measures to Step Down

• Entry:Long at 1.3850 [Trend Line Support)
• Stop: Stop to 1.3800 [50-pip Risk]
• Target 1 (Reward/Risk Ratio): 1.3900 (50/50, 1.00)
• Target 2: 1.3975 (125/50, 2.50)
• Target 3: 1.4050 (200/50, 4.00)
• Timeframe: 4-hours

--- Written by Christopher Vecchio, Currency Analyst

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