Wednesday May 21, 2008 - 09:24:08 GMT
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Great opportunity in the AUDUSD
Sometimes you see something in the charts and you say: Wow! If this is a valid setup the gains could be phenomenal. This is the case now for the AUDUSD. The attached weekly chart of the pair is showing one of the best opportunities (for the long-medium term) that could be seen for a long time.
The decline of the US Dollar with the interest rates differential between the two currencies have moved the pair on and on until these very days. Now, the chart is saying that maybe, and it is always a maybe, the bull market is coming to some momentary end here.
In the price window:
1. First and foremost, the main feature that is visible is the bearish rising wedge. This wedge that starts at the 0.78 level (bottom of August 2007) is approaching its culmination point or a bullish breakout that is rarely seen before. Such wedges are very reliable patterns and because we deal here with a weekly chart, the reliability is even more increased.
2. The overshoot of the price at the upper wedge boundary (blue 1) is not an unusual feature after such a run by the price action. The continuation of this overshoot is the critical point. A re-entry inside the wedge will confirm its validity and by doing so confirm the bearish scenario. A consolidation over it will cause a tremendous panic and stop-losses triggering run.
3. The 40 week moving average, that was a good supporting line for the price (blue zeroes), is now very far from the price and should attract it to return to some "reasonable" behavior.
In the RSI and MACD Histogram windows:
1. Look how the RSI is now in overbought territory (violet ellipses). From these levels, the pair always corrected violently and it is not reasonable to assume another reaction this time. A new leg up (by a continuation of the overshoot) would have to start from such overbought RSI values and this is difficult to believe.
2. The MACD histogram is showing a bearish divergence from October 2007 up to now (blue line). Such long term divergences are very reliable and cause the price to revert to what the indicator is hinting.
A very big opportunity is presenting itself in the AUDUSD. A very long and determined bull market has taken the shape of a bearish rising wedge. Besides this general pattern formation, we now have an overbought situation and a bearish divergence that hints to the possible incoming reversal.
The immediate target for such a drop would be 0.89, because we can find there one of the most potent TA combination: Fibonacci 38.2% retracement (yellow), a support-resistance level with many touch points and lot of activity and the incoming 40 week (200 day) moving average. Further declines should be expected (because of the rules of a wedge break down) but this first target could be the point where the pair would stop, test the wedge from below and then re-start its descent.
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