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Talking Points:

  • Retest of a Broken EUR/AUD Trend Line
  • Key Zone for Initiating New Shorts
  • An Entry Signal That's Forming Right Now

As markets begin to find their rhythm for 2014, we’re beginning to see some more traditional trading patterns. For example, EURAUD has just broken a rising line of support and is now in the process of re-testing it before it decides whether or not to head even lower.

On the daily chart below, a potential head-and-shoulders pattern is developing, and one factor that favors the down side is the fact that price has already managed to produce a lower low.

Guest Commentary: Retest of Broken EUR/AUD Trend Line

A_EURAUD_Short_with_Huge_Profit_Potential_body_GuestCommentary_KayeLee_January7A_1.png, A EUR/AUD Short with Room to Run

Although classical technical analysts require a lower high as well, conditions are favoring a move lower, or at least a consolidation. As a result, a short trade is in order, as this could be the beginning of a new downtrend in EURAUD.

The four-hour chart below demonstrates a beautiful zone of resistance, which is already beginning to come into play. This zone comprises the rising trend line and a medley of previous support and resistance.

Guest Commentary: Key Resistance Zone in EUR/AUD

A_EURAUD_Short_with_Huge_Profit_Potential_body_GuestCommentary_KayeLee_January7A_2.png, A EUR/AUD Short with Room to Run

At the time of writing, price suddenly made a swipe downwards, which suggests that this trade may be preparing to go already. The zone of resistance is estimated as 1.5287-1.5337. As always, however, gaining a precision entry requires going one time frame lower.

Turning to the hourly chart, the trigger would come in the form of bearish reversal divergence, pin bars, or bearish engulfing patterns, and in actuality, a bearish divergence has already formed. Thus, although the entry is late, traders should still be able to hop on with limit orders.

An entry price between 1.5274-1.5280 should be achievable, as price still has to deal with a line of rising support, which could hold it in place for a while yet.

Guest Commentary: EUR/AUD Entry Signal That’s Forming Now

A_EURAUD_Short_with_Huge_Profit_Potential_body_GuestCommentary_KayeLee_January7A_3.png, A EUR/AUD Short with Room to Run

As always, two or three attempts may be required to hop onto this downward move, but given the huge profit potential stemming from the high on the daily chart, this is definitely a potential move that’s well worth trading.

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