AUDUSD Rally Over?
After surveying the daily AUDUSD chart I am beginning to wonder whether yesterday’s movement was sufficient to send a signal that the USD is likely to strengthen again.
If you noticed in our previous chart of the AUDUSD the medium-term downward trending channel that it was inside you would have seen that the upper channel line ended at around 0.7725. Yesterday the AUDUSD went as high as 0.7704 (20 pips shy) and closed the day by forming an ENGULFING BEAR candlestick pattern.
Now in the “normal” trading world I personally prefer my engulfing patterns to have gapped beyond the previous candle’s range, meaning that for engulfing bullish patterns I prefer today’s open to be lower than yesterday’s low, and for engulfing bearish patterns I prefer today’s open to be higher than yesterday’s high.
Unfortunately the forex market is not privy to gapping and thereby renders this pattern useless… or does it?
What is the market’s underlying sentiment when it forms these engulfing patterns?
Well, if we look at the engulfing bear pattern we can see that the market initially had a nice healthy UP day where it opened near its low and closed near its high – obviously the market was very decisive on what it was doing that day. When the next day opened the market CONTINUED with this sentiment by opening higher, however, upon opening the market began to lose its previous bullish sentiment and retreated further than the previous day’s gains.
By interpreting the pattern’s underlying sentiment can we now see that the same thing happened with the AUDUSD in the forex market?
Of course we can.
Let’s have a look at the raw numbers:
On Tuesday the AUDUSD opened at 0.7650 went as low as 0.7639 (down 11 pips), travelled as high as 0.7698 and closed at 0.7686 (12 pips off of its high). The distance between the open and the close was 40 pips, making this day quite decisive… the market only travelled 1/3 undecisively (23/63). Now, on the next day the market opened at 0.7687 (the forex market doesn’t gap) then continued with the bullish flavor by moving as high as 0.7704 (surpassed yesterday’s high) but then fell sharply to as low as 0.7644 (6 pips below yesterday’s open) before closing only 1 pip higher at 0.7645.
Can you see the engulfing bear pattern in this?
I do.
Maybe it’s just me.
So how do you effectively trade the engulfing patterns?
Well, what have we got: resistance at 0.7725 and another resistance point at 0.7704 (the high of the engulfing pattern). I personally would use the high of the engulfing pattern, but for those more risk averse possibly 0.7735 would be better.
Why 0.7704?
Well, to me an engulfing pattern is like a breakout. Something happened at 0.7704 and saw it break in the opposite direction, if price happens to break back ABOVE 0.7704 then it shows that either there has been a fundamental shift in the market, or the engulfing bear pattern was weaker than expected. Hence the reason why I place my stops tighter.
What to watch out for:
With most reversal patterns there are likely to be some hiccups along the way. One of these bumps is likely to be the 50% retracement zone of the recent run up, another could also be the 38.2% Fibonacci retracement zone of the recent run up. Therefore, I’d be looking for any weakness of the bearish move around 0.7620 & 0.7590 (possibly 0.7600 as this is a nice round number).
I do like this trade as we are reversal trading WITH the medium-term trend – my favorite form of reversal trading!
Tags: AUD USD, Forex Trading