AUD/USD – Should we Fade this Rally?

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AUD/USD - Should we Fade this Rally?

NFP Reaction: The AUD/USD fell last week after the US NFP beat forecasts (295K vs. 240K). The Unemployment rate also fell faster than expected. (5.5% vs. forecast of 5.6%). However, the story is the same regarding the subdued wage growth (0.1% average hourly earnings growth), and the historically low participation rate (62.8%). Still the USD gained across the board, and dragged the AUD/USD below a common support around 0.7750.

AUD/USD 4H Chart 3/9
audusd 4h chart 3/9
(click to enlarge)

Reviving Bearish Technicals: In the 4H chart, we should note that the rally in February shifted AUD/USD away from the bearish momentum as the 4H RSI pushed above 60. Also, price pushed above the 100-, and 50-period SMAs, which killed the bearish bias, but bears hung on, respecting the 200-period SMA. Now price has fallen back below these SMAs, and the 4H RSI has tagged 30. The bearish technical conditions are back.

Channel Support: As we start this week, AUD/USD slid a little further but found support at 0.7685. The market is respect a projected channel support and the slightly oversold condition based on the RSI. There could be a short-term rebound. Should we sell into this?

I believe so.

If price approaches the 0.78 area, we should anticipate sellers. The 0.78-0.7820 area involves the cluster of 200-, 100-, and 50-period SMAs as well as the falling channel resistance. There are also some common resistance around 0.7850.

A Sample Trade Assessment:
Let’s say a seller enters at 0.7805 and puts a stop above 0.7850, say, 0.7865. (60-pip risk at stop-loss). Now, the bearish target would be 0.7685 and 0.7650. The 0.7685 target gives this trade a potential reward of 120 pips. This would provide a reward to risk of 2:1.

Other, than R:R, we have to assess the likelihood of a bearish continuation. When we look at the daily chart, we can see that the prevailing trend is indeed bearish, and going with the prevailing trend should give us at least a 50/50 chance of continuing.

While no trade is sure-fire, selling AUD/USD on a rally to 0.78 looks at least satisfactory in terms of both reward to risk and likelihood.

Conservative vs. Aggressive Outlook: Note that the trade assessment is conservative because we are not even considering the 0.7626 low on the year, with risk of extending lower towards 0.76.

AUD/USD Daily Chart 3/9
audusd daily chart 3/9
(click to enlarge)

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.