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Pairs to Range Trade

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A AUDUSD Range Setup That Accounts For Two Of Three Scenarios

Tue, Nov 18 2008, 05:45 GMT
by John Kicklighter

DailyFX

Over the past weeks, AUDUSD has been a frequent range candidate in a market that has been especially prone to congestion. However, ranges are turning into wedges and the threat of breakouts is growing more prominent.

Why Would AUDUSD Stay in a Range?

• Levels to Watch:
  -Range Top: 0.6680 (Trend, Fib, SMA)
  -Range Bottom: 0.6350 (Pivot, Fib)

• There is still a significant amount of congestion to be found in the currency market; but mature ranges and wedges are growing mature and therefore feeble. Fundamentally, AUDUSD is especially prone to a breakout thanks to it is made of one of the top risk-imbued currencies and the most popular safe havens. However, speculation has wrung the interest rate forecast for both the Fed and RBA, which could take a lot of the drive out of the market.

• From a technical standpoint, we have to align a trade setup with a potential breakout scenario. Taking this into account, we are only going looking to go with the dominate trend – short. Resistance is a moving target with a falling trendline (which goes back to September) and 50-day SMA that happens to fall across a notable Fib at 0.66.

Suggested Strategy

• Short: Entry orders will be set at 0.66 – just inside the falling trend we are watching.

• Stop: An initial stop at 0.6655 would cut us quickly should it begin to break. To protect profit, we will move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (55) at 0.6545. The second target will be 0.6450.

Trading Tip – Over the past weeks, AUDUSD has been a frequent range candidate in a market that has been especially prone to congestion. However, ranges are turning into wedges and the threat of breakouts is growing more prominent. To take advantage of the prevailing range, but also accounting for the probability of a break from the technical constraints, our suggested strategy looks to only trade with the pair’s dominant trend. The setup we lay out further looks for a short-term position with relatively tight stops that would cut any open positions relatively quickly should the market break against it. Furthermore, the initial target is set close to secure a positive turn quickly with a second objective still well-within reach considering the extent of the recent range. To lower the risk taken in this setup, we will cancel any open orders by Wednesday or should spot hit 0.6425 before we are entered.

Event Risk Australia And US

Australia – As one of the market’s premier risk-related currencies, the Australian dollar could find much of its direction from unforeseen shifts in fear and greed that constitutes the normal flow of market conditions. As for scheduled event risk, the docket is relatively light. Wednesday’s morning in Sydney, the Westpac Leading Index will give a dated forecast for the growth outlook over the three month’s after the month of the official data reading. By next week, data begins to pickup again just at the cusp of our forecast period. Tuesday brings the 3Q construction work report which is essentially a gauge of the housing sectors contribution to GDP over the period. With the official growth reading for the period not due until a few weeks later, this report will give a good gauge for what to expect.

US – When determining the main fundamental driver of the US dollar, we merely need to look at the currency’s long-term direction. As it is clearly bullish until this point, we know that risk sentiment is overshadowing concerns such near record lows on interest rates and expectations for a harsh economic recession. This means that there is significant risk looming over the market; but no specific driver that we can prepare for. This is just a condition that must be monitored from day to day; but which can be projected ahead of time thanks to the prominence of risk gauges available across the market. As for scheduled event risk, there are a number of indicators on the docket over the coming week that could present trouble for volatility.
However, our time frame for entry only takes into the CPI/housing starts combo on Wednesday. It will be the inflation report that is the more interesting indicator considering its influence on the December rate decision – a potentially history redefining meeting. Beyond that, data won’t really rile the market until next week when the second reading of GDP and the November confidence figure is released.

Published on  Tue, Nov 18 2008, 05:48 GMT