The technical picture based from price action appears to be painting a bearish picture for AUD/USD. The pair appears to have carved an Elliott wave 5-3 sequence which means 5 waves down followed by 3 waves higher. This pattern, if gauged correctly, suggests another 5 wave move lower of similar magnitude to the April 20-May 23 sell off.
Therefore, we will look to initiate short positions on a break below last week’s low near .7303. That way, if price breaks below last week’s low from the initial Brexit reaction, then we can position in the direction of the break with a reasonable risk to reward ratio.
We’ll initially target .7000 for a profit potential of 300 pips and a stop loss near .7450. The risk on the trade is approximately 150 pips for a risk to reward ratio of 1:2.
A positive risk to reward ratio, like a 1:2 ratio, is an important characteristic we uncovered in our Traits of Successful Traders research. If you haven’t already, make sure to read our guide on risk to reward ratios and the other two traits.
Though we don’t know if prices will break and follow through, we do have a couple tools to help. If prices do approach the point of breakout near .7300, check out the Grid Sight Indicator (GSI) in conjunction with the Speculative Sentiment Index (SSI) to see how the intraday momentum and sentiment is shifting.
For example, if more traders are loading into long positions as the live SSI reading climbs above the current +1.50 mark, then that could offer a bearish signal. If this is taking place while similar bearish intraday patterns are showing up in GSI, then momentum and SSI may confirm the break.
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