The AUD/USD has experienced choppy price action over the past few days, as was expected. Following the massive sell-off late last week in the heels of the Federal Open Market Committee policy meeting, a period of at least consolidation, if not retracement, was due to occur to relieve some of the heavy selling pressure. With the move exhausted by mid-Monday, the AUD/USD found itself range trading.

AUD/USD 5-minute Chart: September 30, 2011

Short_AUDUSD_Breakout_Opportunity_Overnight_body_Picture_1.png, Short AUD/USD Breakout Opportunity Overnight

Charts created using Strategy Trader– Prepared by Christopher Vecchio

While a triangle has formed on the 30-minute charts, on a smaller time frame, another triangle has emerged. Given the nature of these triangles, a sharp move lower is expected, at least ahead of the European session open. 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 in a contracting triangle will typically occur with lower highs and higher lows. This is evident on the 5-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 0.9740 on the completion of Wave E looks to open the floor below 0.9740.

Suggested Strategy

  • Entry: Short at 0.9740 [Trend Line Support)
  • Stop: Stop to 0.9759 [19-pip Risk]
  • Target 1 (Reward/Risk Ratio): 0.9730 (10/19, 0.53)
  • Target 2: 0.9706 (34/19, 1.79)
  • Timeframe: 2-hours

Written by Christopher Vecchio, Currency Analyst

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