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AUDUSD January 2014 Forecast
In comparison with its European cousins, the AUDUSD showed considerable weakness in 2013, as evidence by the dropping of price in the chart below. After a steady ascent since 2008, perhaps this was overdue, but the strength of the breakdown would have caught quite a few traders unaware. As the Australian dollar is usually also a focus for the well-known "carry trade", which takes advantage of interest rate differentials between countries, this will have impact for longer term investors as well.
However, the focus is on the immediate likely future of the Aussie, and that is looking decidedly bearish.
Monthly Chart: Bearish Breakdowns
Two rising trend lines of significance have been broken by the Aussie, albeit in a messy fashion. However, standard technical analysis suggests that the bias should be in the downwards direction. Price does not travel in a straight line, however, and it would be unlikely, barring another unexpected crisis, that the move fully matures in the next year.
Thus, there are two likely scenarios of interest:
1. Aussie cooperates well with the analysis, and proceeds to shoot straight down.
2. The more likely scenario is that it will undulate downwards, alternating between consolidations and spurts of movement.
Thus, in 2014, the most conservative traders would likely be able to take advantage of this by selling rises in AUDUSD on weekly and daily charts.
Weekly Chart: Two Possible Moves
The weekly chart brings the overly optimistic picture of the monthly back to the ground. The trend here is clearly bearish by almost any method used to define a trend on a chart. However, the declining wedge pattern in the chart shows where a downward push may find support and struggle.
The two most likely moves discussed above have been mapped out here. Price may begin the year by promptly plummeting, which is the arrow pointing directly down. However, the more likely move is for it to wind sideways and wait a few weeks for price to catch up before continuing the downwards journey.
Thus, end of day traders, and indeed intraday traders, would be positioning themselves to short this move at an advantageous position. The estimated level of resistance is at 0.9196, but given that this is the weekly chart, it is not unreasonable to allow for an error of 150 pips or so either way. This produces a resistance bracket as 0.9046-0.9346.
Weekly Chart: Expected Interaction with Resistance Zone
The daily chart provides a clearer picture for traders who have to decide what the best response is to be in the next few days or weeks, rather than the coming months.
Daily Chart: Will the Retest Work?
At this level of magnification, traders can readily see that a previously steady downward trend has been halted by a breakout from the declining channel. Price is now heading to retest the upper side of the channel line and whether this is successful or not will determine is the blue resistance zone will be tested in the near future.
At this point, traders of different timeframes will have different strategies for dealing with what comes next:
- End-of-day traders will mainly be waiting for the pullback to the resistance zone in order to gain a good short into the expected continuation move downwards. Of course, they may also decide to try obtaining a long position as price heads up, but risk is likely to prove tricky to control on this timeframe. Intraday traders will have a decided advantage there.
- Four-hourly chart traders will be best served in trying to play the bounce off the broken daily channel. Reversal patterns will be clearer at that level of granularity, and there will be ample opportunity to reduce risk quickly on the position with defensive risk management, either by trailing stop losses or scaling out, or both.
- Traders on timeframes below the four-hourly chart could instead look at the sideways range that is developing on the daily. The higher-timeframe traders will be unable to take advantage of this range, as it will be too small for their level of analysis. For an hourly chart trader however, this would be just the right size.
Is it possible that the analysis is completely wrong? That is entirely possible. Price could reverse and go straight up, or even shoot further down without giving an opportunity for entry. However, given the ranging motion it has been exhibiting, the author would be more interested in waiting for the pullback to the resistance zone to initiate a short position.
Kaye Lee is a private fund trader and the Head Trader Consultant/Mentor for StraightTalkTrading.com.