AUD/USD bear trap

AUD/USD bear trap

When a trend is well established it’s easy to become complacent about potential reversals. Many traders have done well this year riding the AUD/USD downtrend, and shorted yesterday’s bounce to 0.7150, where the price met the down trend line.

However, there are signs that AUD/USD is forming a bear trap.

Some traders look for a conflict between fundamental and technical indicators in a currency, due to the potential for sharp moves when consensus expectations are confounded. The fundamentals in AUD/USD favour lower interest rates in Australia and higher rates in the US, suggesting further significant AUD/USD falls are on the cards.

Yesterday’s bounce followed the release of much stronger than expected jobs data in Australia. Interest rate traders backed away from a higher probability of a rate cut previously implied by futures trading. The fundamentals on the Australian side of the equation may be shifting. Depending on near term price action, the daily chart is suggesting the contrarian bulls may get a clear signal.

20151113 audusd

Let’s be clear – this is a decision point. Likely the majority of traders will look to short again near the trend line. While this factor could contain any positive moves initially, it would add to any scramble if the pair breaks through.

Contrarian traders may consider buying (or placing a stop entry buy order) at 0.7175, with a stop loss at 0.7145. As the market may turn chaotic on such a move, allowing a larger than normal boundary on the trade will lower the risk of missing the trade in a fast moving market. The target is 0.7375, just below the October high.