AUDUSD—Monday close below parity

Aussie had its first close below parity in 19 days, finishing Monday at .9947. With all the bad news coming from Japan, prices this morning have dropped to a low of .9861. Fear of radioactivity spreading throughout the Pacific Rim may drive price lower. I'm going to assume that this is not as bad as the situation was at Chernobyl in 1986 and try to focus on technical levels.

AUDUSD was showing signs of weakness before this news event happened. As I've written before, this could be the C leg of a correction on the weekly chart (1.0183 to .9804 being wave A; the move up to 1.0257 being wave B). If this is true, one could see corrections down to .9858 (C=.618A), .9611 (C=A), or .9211 (C=1.618A).

In a situation such as this, I look for confirmation of any given price projection from other methods. In this case, Aussie has a layer of support from .9988 down 179 pips to the prior swing low of .9804. It consists of monthly and weekly pivot support levels, fib retracements (the .382, .5, and .618 of the .9537 to 1.0257 move), the daily 100 SMA, and the weekly 20 EMA. From this, it's reasonable to expect that the C leg might limit itself to approximately .618 of the A leg, a point of view that would be consistent with a reaction after a good climb and with the long-term uptrend.

Should the pair drop below the .9800 level, there's additional support at from .9611 to .9518. This includes the .9537 swing low as well as the daily 200 SMA. However, this drop would confirm the head and shoulders or double/triple top pattern. The target of these is .8819. However, I'll wait until that happens before I try to confirm that number.

The initial support zone is wide at 179 pips but the pair is nearing its bottom. Probably the best action is to sit this out if you're an inexperienced trader. I know that nobody considers themselves inexperienced—after a few months of the trading wars, one can feel rather old. If one has to trade, one might try a buy near the bottom of the support zone with a tight stop. The other possibility, if things continue to look dire, is to sell a rally. The fibs of the most recent drop are .9929 to .9996.

© Dianne Fecteau, 2011. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog, you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.