AUD/USD 1H Chart 11/21/2012 7:55PM EST


Channel Breakout: The retreat from 1.0420 formed a declining channel during the 11/20 and 11/21 sessions. Price fell below the low and start of the week finding a support pivot at 1.0336 during the 11/21 US session. This pushed above the very short-term channel and we begin the 11/22 Asian session with AUD/USD near the 200-hour SMA.

No direction: The AUD/USD started a rally last Friday after after a sharp decline that broke below a key trendline and basically showed signs of topping. And the 4H chart shows that the market has been bullish before this “topping attempt”. And finally if you look at the daily chart, it shows AUD/USD in the middle of a consolidation range. The point is, direction is not aligned in different time-frames. In fact I would say that in the 1H, 4H and daily time-frame, the market looks all to be in the middle of a recent range.

Counter-trend tactics: Would it make sense then to wait until overbought/oversold signals and use counter-trend tactics ? The target for each time-frame should be toward the middle of the range in that time-frame, with the 200-SMA of the respective time-frames as additional guidance. I would avoid targeting the other side of the range in case the market does start to trend -this is just a general concept, not specific to this case, but I think worth noting.

Trading strategy: Let’s expand on that. Let’s say you are looking at the 1H chart. An area of resistance could be 1.04-1.0420 area, like during the 11/19-11/20 session. Also, let’s say at that point, the RSI gives us a bearish divergence, again just like the previous session. Then we might have a bit of correction. (In this specific case, this might be during US thanksgiving holiday, so I am not confidence on the market’s ability to push back.) In anycase, if we play it safe and anticipate the correction simply back to the 200-H SMA just above 1.0380, then we could be in the middle of many possibilities. Meaning, there are many scenarios which include this move. Looking at the 4H chart, we have 3.

1) This indicates a straight bullish push, with a swing projection. This scenario should probably stop you out of the 1H time-frame counter-trend move, though you might consider waiting for 4H OB/OS signals. Basically this scenario doesn’t have to be a straight line, but includes any where there is no correction back to 1.0380.

2) In this scenario, we do have the correction either to 1.0380 even lower, but the market still continues. The correction scenario therefore would be successful.

3) This scenario is one of bearish continuation with focus at the 1.03 handle. The counter-trend target might be too conservative, but it would have been practically correct.

4) And not labeled on the chart, but let’s say the AUD/USd starts to form a triangle instead of going for these highs near 1.0480 or lows near 1.03, there is still a chance that the market will find some resistance around 1.0420 (maybe given some elbow space to the declining trendline. The thing is the risk to reward is likely low in this type of trade. But if you can manage your trade to hold on in case of scenario 3, then there is some additional potential reward, while your risk is fixed to were you would put your stop. ie. 1.0455. (Using scaling from 1.0410 to 1.0450 to average 1.0430, a stop at 1.0460 is 30 pips, reward to 1.0380 is 50 pips. You get the point.

There can be lot more to go into a trade plan as well as adjustments to be made as conditions change. I just want to share the above strategy as a concept, not specifically a trade recommendation. Trade safe, trade well.

AUD/USD 4H Chart 11/21/2012 8:05PM EST