AUD/USD: Four Lessons from a False Breakout

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  • 4H: It is often the case that we learn more from our mistakes than we can from our victories.
  • Take the AUD/USD. Last week, I was anticipating a breakout and a continuation after what appeared to be a completed corrective count. The market indeed broke above a declining channel resistance and broke above the previous high at 0.93.
  • 1st lesson: Throwback can give valuable information. The breakout to some is a trigger to enter the market. Maybe these traders have other confirmations that give them confidence, but a breakout even when its in line with the exisiting trend, and there is a completed correction, could still be a clear-out. A clear-out is pretty much a false breakout. So the lesson here is to wait for a throwback, or a pullback. We may miss a good trade because of this patience, but as you can see in this case, we may also save ourselves from bad trades. A decline became very strong as it ended last week around 0.9250.
  • 2nd lesson: Now this week starts with a bounce from the SMA 200 that closes an opening gap. A bullish signal right? A throwback that confirms? But wait a minute, there was a negative RSI reversal. This means there should be some bearish forces that suggests a swing projection to 0.9150. (Email me at fyang@fxtimes.com if you want an explanation of this projection.) negative (positive) RSI reversals give warnings against bullish (bearish) positions.
  • 3rd lesson: Anticipate 2 corrective waves. There will be times that a single wave completes a quic correction and the market continues. But observe the market more closely and you will see that 2-3 swings are usually the case. Therefore, it would be prudent to not be so quick to think correction is over. So when the week started with a bounce from SMA 200, one should think let's see if the market will have another push down. This happens to be the case.
  • 4th lesson: To generalize lesson 3, understand your personal bias might be to complete a pattern prematurely. As far as I am concerned, it is impossible to predict what pattern will arise. You may have some anticipation of relative time or size the pattern should be based on previous price action, but corrections tend to last just a little longer if not lot. That's what creates all these bull or bear traps. Being too aggressive in going after a completed correction can be devasting, especially if you don't apply lesson 1-3.
  • There you have it, the principles that might save you from future false breakouts.
  • 1H: Looking at the 1H time-frame we see that the 161.8% expansion of the first down swing would bring the pair down to 0.91. The decline will probably see support around the 0.91 area.

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Fan Yang  Currency Analyst Commodity Trading Advisor