The Aussie currency pairs are trending strongly at the moment. DV34 who frequently contributes comments to the blog has been kind enough to provide a detailed post on his technical analysis of Aussie: CAD.
Although both are regarded as "commodity" currencies, Aussie is looked upon as being more China exposed than the Loonie which is more heavily influenced by oil prices and the US market. I hope you find it useful to get an insight into DV's approach to markets.
AUDCAD Potential Short Term Reversal Zone contributed by "DV34"
Following on from my initial post on the Dow, I thought this may be of interest as I am watching it closely at the moment…
I am usually a swing trader on 1-4hr charts, but am showing some higher timeframe levels/ setups simply due to the time involved in preparing these articles.
I am wary of longer term trades this week in particular as there is plenty of event risk in the coming days and even a Canadian interest rate decision due in two hours (5th Sept) while I am writing this – (When I finished this it is 1.0% unchanged…)
I thought I would take a top-down approach for this as it has a few things worth noting
The chart below is the monthly chart for the AUDCAD; interestingly it has formed into a wedge type formation and broken out this month (so far), with a gap…
There are a couple of key levels to watch on this, mainly to see if the market just falls to the fib cluster below straight away or if it retests the wedge level again –
On the weekly chart I have shown some simple trend lines for possible support/ resistance, although I personally put far more emphasis on horizontal levels as they are fixed numbers.
The lines in blue show my proposed order levels and how they relate to higher timeframe key levels (if this trade works out)
The point A on daily chart (noted Sell Zone on weekly) was exactly a 78.6% retracement of the all time high, this is quite deep and considered corrective which coincides with the overall choppy range bound weekly chart bouncing off support and resistance levels within a large 500-700pip range
The indicator shown below is a DTOSC or DT (Dynamic Trader) Oscillator derived from Robert Miners Fibonacci work, which is simply a combination of a stochastic and RSI, it is not really that important in my view and only a ‘nice to have’ agreeing - in this chart it is in the oversold and possibly about to cross which adds about 3% probability in my view (or less)
On the daily chart there is a combination of a few things that I though looked interesting, namely a broken wedge, which targets around the 1.0050 level from the breaking point (dotted arrows are the same length), which coincided with what I think could be a harmonic bat pattern level.
A harmonic pattern for those who don’t know is simply a Fibonacci cluster level using a limited number of Fibonacci ratios, which often coincide with a Potential end of three wave corrections.
Harmonic traders call these cluster levels PRZ’s or Potential Reversal Zones.
The bat pattern is basically a potential ABC correction at the 88.6% retracement (with some certain guidelines), running some fib extensions from AB from C, BC from C (or CB from C), and XA 88.6% retracement. There a lot of other harmonic patterns but most are based around similar fib ratios.
The projected fib cluster zone shown is just slightly above the 88.6% level, also I thought the market running 9 daily red bars in a row was starting to look a little stretched – although there is nothing to say that it cannot go further.
Often, long series of red bars are followed by either sharp retracements or temporary pauses to relieve any oversold conditions as the reward to risk becomes a little stretched and fewer traders become interested in chasing it.
I.e most indicators are based on a look-back period ranging from 7-26 (mostly 14) periods such as RSI which is only oversold relative to 14 periods ago…
Other supporting factors around this area included a demand zone that I have highlighted yellow and two weekly trend lines crossing around this area, the DTOSC indicator about to cross upward and the psychologically important big round number 1.0000
In terms of targets, I think due to the steepness of the decline, and a broken monthly pattern I prefer to get out quickly, one obvious target was the gap close (there are many strategies on trading gap closes) this also coincided with the 38% retracement of C-D leg which made a nice confluence level
However, when I checked the fib retracements of the A-D decline I found that the 1st fib retracement level (23.2%) is actually the weekly gap OPEN, so that is my first target @ 2:1 (approx), the second is the point B, as looking at the monthly chart, I actually would like to position myself short and preferably around or above that level… preferably in a 3 wave correction upwards! But we will see how it develops
Interestingly, if you look closely to the left the two circled areas are similar type trades to my last post (and also on the monthly chart)
Also I noticed a similar bat pattern on the USDCAD as well, which you may well sometimes expect... as you can see below. This suggests if the USD breaks up or down, the AUD is likely to follow.
I am planning to trade the AUDCAD long short term, and try to position myself short for a longer term swing/ position trade short based on the monthly/ weekly charts (hopefully) with a lower timeframe entry.
Mainly because I believe the AUD in general has had a nice run down all round (AUDUSD down from 1.06 to 1.02 – 1.0225 being my proposed target weeks ago) for a nice wave 1, and I would like to short them again a bit higher from current levels for what could be the start of a wave 3 (large) move down…
Again this is yet another counter trend trade which is how I trade, and they are risky by their very nature… if you take anything away from this at all - it should be this:
Do not short into support zones after a big run…or vice versa! Especially in choppy markets…!
…and always keep an eye on your higher timeframes for key levels
Hope this helps, and all the best!