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Australian Dollar Drop - Reversal or Buying Opportunity?

By , Sr. Technical Strategist
22 February 2012 21:19 GMT

DailyFX Edge – Powered by EidoSearch Inc.

DailyFX Edge combines the opinion of an experienced market analyst with the science of EidoSearch, a powerful pattern recognition tool.

AUDUSD Daily Bars

Australian_Dollar_Drop_-_Reversal_or_Buying_Opportunity_body_audusd.png, Australian Dollar Drop - Reversal or Buying Opportunity?

Prepared by Jamie Saettele, CMT

The AUDUSD decline from the 2/8 high may be complete as a 4th wave correction. The implications are for a final bull leg that probably reaches the 2011 high at 11080. Common Fibonacci relationships define objectives as well; Wave 5 = 1 at 11153 and wave 5 = 61.8% of waves 1-3 at 11236.

(Elliott wave theory posits that moves in 5 waves are followed by at least a 3 wave move in the opposite direction).

AUDUSD 60 Minute Bars

Australian_Dollar_Drop_-_Reversal_or_Buying_Opportunity_body_audusd_1.png, Australian Dollar Drop - Reversal or Buying Opportunity?

Prepared by Jamie Saettele, CMT

AUDUSD corrective characteristics include the 3 wave drop, price adhering to a channel, and the equality of waves a and c (exact equality would be at 10600, the low is currently 10604). Ideally, a low is in place at 10604 but the 2/1 low at 10568 allows for a more objective stop.

EidoSearch – 10 Day Backtest

A search for patterns that match the series of closes from 01/06/12 (wave 2 closing low) to 02/21/12 returns 55 matches with a score of 80 or better. 10 days later, the AUDUSD had advanced 33 times by an average of 2.00% and declined 22 times by an average of (1.06%). The largest advance after 10 days was 6.84% and the largest decline after 10 days was 5.98%.

Statistics

Australian_Dollar_Drop_-_Reversal_or_Buying_Opportunity_body_Picture_7.png, Australian Dollar Drop - Reversal or Buying Opportunity?

Chart

Australian_Dollar_Drop_-_Reversal_or_Buying_Opportunity_body_Picture_8.png, Australian Dollar Drop - Reversal or Buying Opportunity?

Histogram

Australian_Dollar_Drop_-_Reversal_or_Buying_Opportunity_body_Picture_9.png, Australian Dollar Drop - Reversal or Buying Opportunity?

Summary and Trade Idea

The EidoSearch test results confirm the call for a 5th wave rally to a new high. In other words, the edge over the next 10 days is with bulls. In general, look for lows in early Australian trade (5-7 pm EST). Longs are favored against the 2/1 low of 10568. A drop below that level exposes 10450. The minimum objective is 10844 but a more aggressive objective is above 11200. Follow me on Twitter @JamieSaettele for updates.

--- Written by Jamie Saettele, CMT, Senior Technical Strategist for DailyFX.com

To contact Jamie e-mail jsaettele@dailyfx.com. Follow me on Twitter @JamieSaettele

To be added to Jamie’s e-mail distribution list, send an e-mail with subject line "Distribution List" to jsaettele@dailyfx.com

Jamie is the author of Sentiment in the Forex Market.

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22 February 2012 21:19 GMT