The Bear Trap
After deciding to remain on the fence throughout the beginning of April we have researched the Foreign Exchange market over the weekend as well as US equities as we near the earnings season. After examining EURUSD we are unable to determine the trend as a firm resistance is noted at 1.1140. Although the pair seems fairly bullish at the time of this writing the required stop loss order is immense. We decide to opt for an intraday entry throughout the week that will suffice our risk management. We have also analysed GBPCAD as we are considering a re-entry to the FX cross but we require further weakness to meet our technical models.
The Australian Dollar
We have discovered the Australian Dollar (AUD) appears to be fully ripe for a bullish correction against a basket of currencies such as GBP, USD and EUR. The pairs we have focused on are GBPAUD. AUDUSD and AUDJPY. After conducting a deeper analysis we are suspecting this is a classic bear trap in which AUD downtrend may resume after a minor retracement. Despite the negative swap that will be incurred by shorting AUD we believe Monday’s session along with the Reserve Bank of Australia (RBA) monetary policy will be sufficient to allow us to realize partials over the trade rather than holding the trade for a substantial period of time.
The required stop in GBPAUD is out of proportions and will therefore be dismissed. We favour shorting AUDJPY as we will not short AUDUSD as well. High exposure to AUD is unnecessary.
AUDJPY Weekly Chart
The technical chart emphasises the risk for a double-bottom reversal pattern where a firm support is noted by the 200-Daily Moving Average (DMA). As great as it may appear we believe it is a false technical signal based on our models. In order to execute the short trade AUDJPY is required to trade higher to provide us with a clean entry. We will be using the 4hr chart for our trading strategy.
AUDJPY 4hr Chart
We have multiple resistance levels that would allow us to execute the short trade (blue lines). If AUDJPY gaps lower instead of correcting higher it will be a difficult decision to make and we are likely to negate from the short trade but we will study the market before making such a decision. Our take profit will also be determined when an entry is provided but as you know we strive towards a 1 : 3 Risk – Ratio (RR). If our bear trap assumption is incorrect the market is likely to trigger our protective stop loss order, which we accept as it is within our risk management strategies. If you have recently joined our trade alerts you will be instantly notified when an entry is provided.
Key Technical Levels
Below are the key technical levels for this week based on the 4hr chart. The price levels may assist your decision-making in place stops, take profits and breakout strategies.
06/04/15 UPDATE: AUDJPY posted moderate gains, affirming the left-hand shoulder of the reversal pattern on the 4hr chart. Although we would prefer a higher price that will allow us to set a tighter stop we are executing the short trade at market price as part of our trading strategy we discussed above.
AUDJPY 4hr Chart (at the time of this writing)
AUDJPY short at market price, take profit at 88.20, protective stop loss layered at 92.06. We are aware of the speculation that the BOJ may expand its monetary policy but we believe the RBA will determine the trend in AUD.
06/04/15 UPDATE II: As we suspected, AUDJPY has retraced lower, trading at 90.91 at the time of this writing. We are closing 10% of the trade at market price.
06/04/15 UPDATE II: AUDJPY is trading at 90.78 at the time of this writing after posting a low at 90.68. The bearish move took out the bulls’ stop as we predicted, however, we are uncomfortable with the recent volatility. We are closing 20% of the short trade at market price.
07/04/15 UPDATE: Recent weakness in AUDJPY appears to have been as a result of stop hunting operations that were conducted in other pairs. We are uncomfortable with the selling pressure as it means the weakness we have anticipated may not be related to the upcoming monetary policy meeting, which may lead to moderate gains in AUDJPY.
AUDJPY 4hr chart
In fact there is a technical entry to long AUDJPY but we refrain from executing the trade. Instead, we are closing 40% of the short trade at market price and reluctantly shift the protective stop to the entry.
07/04/15 UPDATE: Moderate gains were noted in AUD as the RBA left rates on hold. The protective stop loss order but was triggered at the entry but we have liquidated most of the trade with a profit ahead of the RBA decision. This analysis is now available to all traders. Our latest trading strategies are displayed in the homepage.
Digital Derivatives Markets is a global leader in trade alerts and market education.