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Long and Short Opportunities in AUD/CAD

Long and Short Opportunities in AUD/CAD

2013-11-19 00:35:00
Kaye Lee, Head Forex Trading Instructor
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Talking Points:

  • Developing Downtrend on AUD/CAD Daily Chart
  • Short Set-up on 4-Hour Chart
  • Long Scalp Trades for the Short Term

AUDCAD is offering two trade possibilities as it begins to display a potential downtrend on the daily chart. A rising support line has been broken, but it is only now being retested. A declining channel is also potentially forming.

Guest Commentary: Beginnings of an AUD/CAD Daily Downtrend

Long_and_Short_Opportunities_in_AUDCAD_body_GuestCommentary_KayeLee_November18A_1.png, Long and Short Opportunities in AUD/CAD

An actual downtrend still has yet to be formed, however. The lower high and lower low formation is encouraging, but the untested broken uptrend line is an issue. Before price gets there, it will have to deal with resistance from the declining channel, as shown on the daily chart.

In looking at the four-hour chart below, which magnifies the declining line of resistance from the downwards channel, an estimated resistance zone has been obtained between 0.9840 and 0.9878.

There is a rising wedge pattern, but given the daily chart pattern, it is anticipated that the price may overshoot upwards out of the wedge into the resistance zone before turning around.

Guest Commentary: Key AUD/CAD Resistance Zone

Long_and_Short_Opportunities_in_AUDCAD_body_GuestCommentary_KayeLee_November18A_2.png, Long and Short Opportunities in AUD/CAD

Of course, as indicated on the daily chart, this resistance may not be able to overcome the magnetic power of an untested broken trend line. However, it is a valid area for taking nibbles at the short side.

Traders should be ready to take one or two tries on the short side on the hourly chart should price rally to this area and give short signals like pin bars, bearish engulfing patterns, or reversal divergence.

At the time of writing, the pattern is far from ready to be traded, and it may take some time to get there. However, a lower time frame may offer a more immediate trading opportunity.

The hourly chart below shows a pennant, or triangle pattern, following a declining move and the formation of a pole.

Using the Fibonacci expansion tool and estimating a breakout level from the end of the triangle, a break to the downside would have to deal with support from the 0.9771-0.9783 zone.

Guest Commentary: Potential AUD/CAD Buy Opportunity

Long_and_Short_Opportunities_in_AUDCAD_body_GuestCommentary_KayeLee_November18A_3.png, Long and Short Opportunities in AUD/CAD

For those who want to understand the reasoning behind this long-entry opportunity:

  1. A pole followed by a consolidation pattern (flag, pennant, etc.) is usually followed by a breakout in the same direction as the pole move, which, in this case, is down.
  2. That move is usually projected to be 61.8%, 100% or 161.8% of the original pole's move.
  3. However, in this case, that level would be a break of the larger rising wedge pattern, which suggests that price should not go too far before being pulled back up to retest the underside of the broken rising wedge.
  4. Thus, the 61.8% -100% levels form a reasonable zone in which to look for a long scalp set-up.
  5. This move has justified reward for risk because the potential of the move is to begin a longer-term swing upwards to trigger the hourly short trade described in the first half of this article.

Those who wish to prepare for the trading opportunity should be eyeing 15-minute-chart longs for this second set-up, which would be triggered especially by pin bars, although bullish engulfing patterns and reversal divergence would also be acceptable.

Keep in mind this is a countertrend trade, and so a large part of the position (up to 75%) should be taken out as defensively as possible at the first sign of trouble, with a small, longer-term component held just in case this trade runs a long way into profit. After all, the higher-time-frame short may fail as prices race up to retest the underside of the broken trend line on the daily chart.

In this transitioning AUDCAD market, the best response is to have a mindset and trading plan for both shorts and longs, as we’ve described here today.

By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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