By: Jeremy Wagner, Lead Trading Instructor, DailyFX EDU
The AUDUSD has been climbing in a rising wedge for the past 2 days. Prices are coiling up and this bearish pattern looks poised to break lower offering a sell opportunity. The Commodity Channel Index (CCI) is flashing a bearish divergence signal and is breaking below its support line as well.
The Trade Opportunity
Sell the AUDUSD on a break below support near 1.0365.
Place a stop just above the recent swing high near 1.0410.
Look to take profits near 1.0240 for a nearly a 1:3 risk to reward ratio.
The Trade Set Up
(Created using FXCM’s Marketscope 2.0 charts)
There are 5 points building this bearish set up.
-Bearish rising wedge pattern
-Horizontal resistance at 1.0384
-200 Simple Moving Average on the daily chart at 1.0396 indicating resistance
-CCI indicator showing bearish divergence
-CCI indicator breaking its support line
The rising wedge was drawn by connecting the low of the wicks on prices from 9/15 and 9/16 to form a support line. A break of this support line will be our trigger into the trade. In addition to this wedge pattern, a horizontal red resistance line is formed from the high on 9/12 at 1.0384. Also, the daily chart sports the 200 Day simple moving average at 1.0396. This moving average is watched by institutions and can provide resistance as well. This helps create a potential bearish set up.
Additionally, the CCI oscillator is giving us 2 additional bearish signals. First of all, the yellow boxes on the chart indicate bearish divergence. That means the prices are pushing higher and creating higher highs, while the indicator is not confirming. The indicator in this case is creating lower highs. That means this move to the upside is losing momentum…much like when a car runs out of gas. The car can still move forward, but it doesn’t have the push like when there was gas in the tank.
Seeing this bearish divergence near resistance prices helps create a good opportunity at a good risk to reward ratio. Now the question is timing the trade.
The upward sloping support line on the CCI indicator is starting to crack as well. The blue CCI indicator is starting to break below the support line. The indicator sometimes leads a break of the price trend line. So we can time this entry on a break below the price support line.
Additional Resources
How to Trade the Commodity Channel Index in Forex
Jeremy Wagner contributes to the Instructor Trading Tips articles.
http://www.dailyfx.com/how_to_trade_forex/course_trading_tips
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