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Talking Points:

  • The Relentless 2-Month Uptrend
  • 3 Cautionary Factors That Favor the Downside
  • How to Scalp on Lower Time Frames

Many of the important FX crosses haven’t been showing reasonable entry points of late, particularly because some have been very strongly trending. However, GBPAUD is pulling back just slightly after a strong two-month trending period, and despite how late in the move it is, there may be a chance to enter on the lower time frames.

Even a brief study of the daily chart below would tell traders that the trend is up, and the best risk/reward set-ups are typically found in long trades.

Guest Commentary: Strong Uptrend on GBP/AUD Daily Chart

A_Chance_to_Enter_a_Raging_GBPAUD_Uptrend_body_Picture_3.png, A Chance to Enter a Raging GBP/AUD Uptrend

There are, however, several arguments for the short side as well:

  1. This entry is late in the trend. Nonetheless, trends can go on longer than seems rational, and thus, it is generally wiser not to try to outfox price action
  2. Even if this is an uptrend, price may pull back beyond the rising line of support, especially since bearish divergence is likely to be seen in many oscillators
  3. The current daily candle is threatening to create any number of bearish formations, most notably an evening star-type scenario

As a result, the trade should be taken initially as a scalp on the lower time frames using relatively tight entries and defensive trade management. However, there’s always the possibility of this developing into a longer-term swing trade in due time.

The four-hour chart below does not add much to the study of the trending landscape except for the Fibonacci expansion applied to the last downswing. Price will meet the rising line of support near the 61.8% Fibonacci expansion level, which is to say that this last downswing may be smaller than the previous one.

Guest Commentary: Key Fibonacci Support Level for GBP/AUD

A_Chance_to_Enter_a_Raging_GBPAUD_Uptrend_body_Picture_2.png, A Chance to Enter a Raging GBP/AUD Uptrend

If the trend line breaks, then the 100% Fibonacci expansion level will come into play, but in that scenario, an analysis of the breakout would be necessary.

The hourly chart below actually gives some cause for concern, as the pullback is displaying five-wave Elliott-type characteristics. For Elliott Wave enthusiasts, wave 4 has been chosen because it respects the "rule of alternation," which implies that since wave 2 in this case was deep, wave 4 is often shallow. It is not an Elliott “law,” but it is often true. Nonetheless, this suggests that if the current move is a wave 5, price may turn before even reaching the trend line.

Guest Commentary: Potential 5-Wave Pattern in GBP/AUD

A_Chance_to_Enter_a_Raging_GBPAUD_Uptrend_body_Picture_1.png, A Chance to Enter a Raging GBP/AUD Uptrend

The support zone has been determined using previous resistance to estimate the higher portion of the zone, and when combined with the Fibonacci expansion level, the zone of interest is 1.8468-1.8514.

This trade should be initially taken as a scalp trade on the 15-minute chart (not shown), entering on either bullish reversal divergence, bullish engulfing patterns, or ideally, pin bars.

As always, traders should be prepared to take two or three attempts at entering this trade, and it should be managed using multiple positions so that part can be scalped out quickly at the first sign of trouble. In that scenario, the remainder could be left to develop into a potential swing trade.

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