Strategy of the week – AUDCHF
This week’s strategy of the week will focus on AUDCHF that perhaps is on the verge of a major weekly move.
AUDCHF – Correlations
AUDCHF mostly reacts to price action from these two pairs â AUDUSD and USDCHF
The chart above shows the correlation between AUDCHF (Candlesticks chart) and AUDUSD (pink line).
You can clearly see how AUDCHF correlates beautifully with AUDUSD. In fact, AUDCHF weekly downtrend (started at 2012) was mostly influenced by a series of rate cuts by RBA.
In the middle of 2015, the bearish pressure from RBA stopped and since then AUDCHF has been rising thanks to a recovery in AUDUSD’s price (see the correlation)â¦ and also thanks to USDCHF that rose from 0.93 to 1.0 and pulled most of the CHF pairs higher with it.
It is important to understand that when you decide to trade Cross Pairs, like AUDCHF for example, it is better to pay attention not only to the specific pair’s chart, but also to the charts of the powers behind it (you’ll need to do some correlations analysis for that)
Let’s look at USDCHF for example:
USDCHF price is in the middle of a bearish correction wave that started when this pair completed two harmonic patterns, about two months ago.
This correction wave probably isn’t over yet and has the potential to reach USDCHF’s weekly uptrend line.
Now that you understand that USDCHF is only in a correction wave, would you consider taking a longer term bearish position on AUDCHF? Probably notâ¦
Such decision can make sense only if you anticipate a very strong bearish move in AUD pairs because of some fundamental reason (more rate cuts by RBA for example)â¦Or a very strong move of the CHF currency (SNB has quite a record of market intervention!)
As technicians we do not forecast fundamental moves and therefore we need to understand the environment we are trading and adjust our target accordingly.
*Notice â The correlations with USDCHF and AUDUSD, along with the weekly chart analysis that you’ll see below show a potential for a bullish breakout. That is why it is important for me to clarify that the bearish scenarios that I’ll describe below are short term bearish scenarios and counter trend setups. You need to consider this as a risk factor and adjust your risk management plan accordingly if you will decide to trade one of the scenarios mentioned below!
Starting with the weekly chart analysis:
The weekly chart shows us that during the first quarter of 2016, AUDCHF finally broke out of its weekly downtrend line. The successful breakout was confirmed few weeks after when AUDCHF bounced from the broken trend line and confirmed the support of the new weekly uptrend line.
Notice how the MA lines (50 and Fast MA line) have started to act as supporting lines? That’s a sign of a bullish trend.
The bulls kept knocking on the 0.75-0.76 resistance zone for about a year till finally, two weeks ago, they managed to push the price above that zone and generate a breakout.
But that breakout move was limited â The 200 weeks MA line was waiting right around the corner and indeed the price felt its pressure last week and formed a weekly Doji.
The 200 weeks MA line isn’t something that you want to bet againstâ¦ not if you are a careful and responsible trader. That is why Buying AUDCHF below the 200 weeks MA line is a pure gamble while Selling AUDCHF below the 200 weeks MA line is a reasonable speculation
If you want to trade the weekly breakout you should probably:
- Wait to see that 0.75-0.76 turns to support (breakout confirmation)
- Look to buy AUDCHF from stronger support zones (like 0.75 for example)
- Wait for the price to break above the 200 MA line, confirm the breakout and then use a pullback to go long.
Daily chart analysis â Short term bearish scenarios
As I explained above, buying AUDCHF at current price level doesn’t make sense.
Instead, perhaps the 200 weeks MA line that already proved as resistance last week can be used to find short term bearish opportunities that can be traded (trading the blue pullback arrow shown above)
The daily chart provides us two potential bearish scenarios:
- Price Action â Outside Bar and the top of a trading channel (blue dashed lines)
- Harmonics â Bearish AB=CD pattern
The Outside Bar scenario
Outside Bars are Price Action patterns that need to be triggered by the following candle.
In our case, in order for the Outside Bar to turn to a bearish reversal pattern, the price must close below the Outside Bar low. That almost happened last week when the price spiked below the Outside Bar low, but didn’t close below it!
The trading scenario I’m showing above requires the price to decline back below the Outside Bar low and trigger the reversal pattern. In such case, the stop loss should be above the Outside Bar high and my final target zone for this setup is the bottom of the channel and the 50 MA line.
*Aggressive traders can try and find some intra-day levels within the Outside Bar’s body (like a 61.8 Fibonacci retracement for example) that will allow them to Sell AUDCHF from higher levels.
The pros with this approach are the tighter stop loss and the better R/R
The cons are that the entry is without the trigger that turns the Outside Bar to a reversal pattern.
The harmonics scenario
The harmonics scenario that you can see below suggests that AUDCHF price may continue a bit higher and even spend some time above the 200 weeks MA line.
In this scenario what we don’t want to see is a close above the 200 MA line. Instead what we want to see is a spike above the 200 weeks MA that will follow with a quick decline and a close below resistance â That will generate a False Breakout signal.
The entry zone here is near 0.78.
The pattern’s PRZ is above 0.78 but it is better to be cautious and wait to see some reversal patterns inside the PRZ that will drive the price back below 0.78.
I’ve marked 0.76 as my target zone for this setup but the first thing you should look for is a close below the 200 MA line and below the trading channel’s top (perhaps you can set those as short term target zones in which you take and protect your profits).
The 100 pips stop loss I used in this example allows the price some breathing space inside the pattern’s PRZ and still provides a R/R of 2.
Few words about False Breakouts
There’s no reason to be afraid of false breakouts.
Newbies fear them, they don’t know how to handle them. Pros know how to exploit them.
It is very common to see false breakouts near high importance lines such as the 200 weeks MA line:
The example above (also AUDCHF weekly chart) shows multiple bullish opportunities that were created following false breakouts between 2006 and 2008.
As long as you understand the dynamics of false breakouts and you know how to properly manage your risks in such scenarios, you can definitely trade them.