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A Rare Reversal Pattern in AUD/CAD

A Rare Reversal Pattern in AUD/CAD

Kaye Lee, Head Forex Trading Instructor

Talking Points:

  • A Notable Sign of Changing Market Conditions
  • Possible "V" Bottom Reversal in AUD/CAD
  • Key Support Zone for Initiating New Longs

There have been a couple recent trades that suddenly turned and ran in the other direction before reaching the key support and resistance zones where risk could be better controlled. As a result, these set-ups never triggered. Notable among these is the short set-up in EURGBP we spotted on Tuesday, and this long intraday continuation trade in EURAUD we discussed early Wednesday.

While this may be frustrating for newer traders, it actually provides valuable feedback about the trading process, and this information can be acted upon. Now, a single trade that runs away and doesn’t trigger is just par for the course in trading, but when they line up in a row like this, several important observations can be made.

In particular, these trades indicate that:

  1. The market conditions are changing. This change is more profound than a shift from a trending market to a non-trending one, or a trending market to a strongly trending one. It is more likely that the market is changing rhythm as it approaches the holiday season. Inevitably, calculations that are based on that rhythm are now going to be out-of-sync as the new pattern establishes itself.
  2. This does not mean that the set-ups will stop working, but it is more likely that they will throw a few curve balls, such as trades not triggering (which is preferable), or requiring two or three entry attempts (which is far less preferable). Thus far, it has been rather benign and produced more of the first variation.
  3. Finally, and perhaps most importantly from a technical standpoint, this typically also means that profitability is being redistributed across multiple time frames. Readers will have noted that recent articles have referenced the less-commonly-used 15-minute chart, rather than the hourly chart, as profitability hopped in that direction. Now, it would appear that the markets have taken a step back and shifted profitability to the four-hour chart.

This is an incredibly important point, because traders who define themselves by one single time frame will likely fall victim to this shift in overall momentum structure. They will either get into choppy and confusing markets, or will not have legitimate set-ups and will be forced to stand aside.

As one man's trash is another man's treasure, even two missed trades in a row is a sign to pay attention to other time frames, and that’s precisely how we’ve uncovered the AUDCAD swing trade set-up described in this latest article.

As shown below, the weekly chart of AUDCAD is in a downtrend, but the last move up provides some suspicion due to the symmetry of the legs, which form a “V bottom.” Such patterns are comparatively rare, but can prove to be early trend-reversal signals.

If the bottom has indeed been made, then there are a few patterns that can develop, the most popular ones being the double bottom and the 1-2-3 bottom. In this case, it is the latter that we are interested in, as it essentially says that price should soon form a higher bottom.

Guest Commentary: Possible “V” Bottom Reversal in AUD/CAD

A_Rare_Reversal_Pattern_in_AUDCAD_body_GuestCommentary_KayeLee_December12B_1.png, A Rare Reversal Pattern in AUD/CAD

On the daily chart below, price is headed down as part of an unusual pattern, the expanding wedge. It is also giving a reversal divergence, which suggests that it should at least hesitate and potentially turn up soon.

Guest Commentary: Rare Pattern on AUD/CAD Daily Chart

A_Rare_Reversal_Pattern_in_AUDCAD_body_GuestCommentary_KayeLee_December12B_2.png, A Rare Reversal Pattern in AUD/CAD

A look to the left of the current price will reveal a lot of previous support and resistance, providing a reasonable area to consider a countertrend bounce. Thus, the logical zone of support is between the horizontal support/resistance and the declining line of support from the wedge, which is shown on the four-hour chart below.

Based on the above arguments, the support zone has been estimated at 0.9396-0.9500. This 104-pip zone may seem like a rather large amount, but this is a swing trade to be taken on the four-hour chart instead of the usual hourly chart.

Guest Commentary: Key Support Zone for Initiating AUD/CAD Longs

A_Rare_Reversal_Pattern_in_AUDCAD_body_GuestCommentary_KayeLee_December12B_3.png, A Rare Reversal Pattern in AUD/CAD

As a result of the swing nature of this trade, this is a reasonable support zone, especially in light of the fact that the initial target on the first line of resistance is nearly 200 pips away.

As always, a reversal divergence, pin bar, or bullish engulfing pattern (on the four-hour chart) will be valid triggers for this trade, and traders should be willing to take two or three tries at entering in order to make this trade work.

By Kaye Lee, private fund trader and head trader consultant,

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