Trade Signals and Setups for the AUDUSD, the DOW and an Important Clarification on an Improperly Used Trading Term
First off, before we get into any of these instruments, something should be said about a term that is being thrown around a lot lately. That is the term ‘Oversold’.
In a rising or bull market, being oversold usually represents a good buying opportunity.
We are not in a rising or bull market. We are in a falling/bear market so the term oversold has a different meaning. We cannot just take it to mean the same thing.
Being oversold in a bear/falling market represents the strength of the selling and that it will likely continue. Markets can be oversold for a long time in falling markets so don’t think because something is oversold its going to bounce or time to buy. Think of 2008. Who would have expected the major markets or EURUSD or GBPUSD or any of the pairs that got hammered to fall as far as they did? Nobody.
That is because markets, especially currency markets, can overextend their moves. So any instrument, particularly currencies being oversold does not mean reversal or bottoming formation. Thus, don’t get caught up in the sensationalism or claims of pundits out there. Very few of them are traders and get paid whether they are right or wrong.
The bottom line is the market doesn’t care if its oversold, there is absolutely no confidence in equities or anything to do with risk. The world is changing with the US losing its AAA credit rating which affects the entire paradigm of the global financial world. China has trillions in USD and has to re-evaluate holding these seriously. US bonds are no longer iron clad for being safe and with the political polarity being at an extreme with the ridiculous political gamesmanship being played at the expense of the US people and others globally, people are not confident the problem will be solved.
Oh yeah, did we mention Italy is this months Greece and still not priced into the market? Did we mention the problems in the Eurozone are also shattering confidence in the region and what this means for global or at least regional stability?
Pile on a cooling China, which means them buying less commodities (which have been propping things up due to their nascent consumption) and everyone is freaking out. Neither the US nor Europe has actually dealt with the problems and tried to put band-aids on a limb that was eaten by a shark. Now all those problems are coming to the fore and covering it up is no longer an option.
But then neither the US nor Europe has any useful weapons to deal with these problems legitimately so throwing a bucket of water on a raging inferno and go figure things are looking like its all going to burn down.
With that being said, market psychology will over-rule any inkling of the markets being oversold so don’t get caught up thinking ‘its sold off a lot, it has to bounce’. Think Bear Stearns and its possible this could happen. The market doesn’t have to do anything rational. So forget about the market being oversold, learn to read the price action which is screaming ‘sell’ until it shows any stability to hold a price level for more than a few hours, and take advantage of these opportunities which do not come often.
Some quick facts and then we’ll get into the charts;
1) DOW posted its 6th largest loss in history
2) SPX sold off exactly 6.66% – is it a sign? 😮
3) 3yrs ago to the Day was the last time BOTH $SPX & $INDU broke below their 200 week MAs..what followed then is a story you all know
Forex First then the Global Indexes
And before we get into these – because the moves are so large and critical, don’t get caught up in smaller time frames. You will miss out on big opportunities by not seeing the larger picture here. We’ll say more about this soon.
AUDUSD – Coming Up to a Critical Barrier
Assuming today ends in a down day, the AUDUSD will have shed over 900pips and sold off 6 out of the last 7 days. In the last 3 days its lost almost 700pips. It smashed through the 38.2% fib at 1.0203 of the last major upmove from 8764 (sept 2010 lows) to the all-time highs just shy of 1.1100. If we extend the fib all the way down to the 2010 lows to the all-time highs, then the 38.2% fib sits at 9923. Parity is only 94pips below so that will represent a decent number but we really do not fell anyone is ready to park serious longs on the pair just yet. Below this, we feel 9790 and 9700 may attract some interest here so look for any sustained signs of bottoming.
Absent these, next up is 9545 (Oct 2010 low), 9500 (Big Figure) and 9400 (5mos resistance for 1st half of 2010). At that point, we suggest waiting as there is a very long base of resistance here (Sept 2009 – May 2010) which could offer some solid support. But if the market is still crashing, forget about this.
With that being said, the option comes up do we a) sell on a major break or b) sell on a pullback?
We always opt for option b as it allows us to get better risk for our trade, to see the strength of the rally, along with get in aside institutions which are likely looking to sell rallies in most risk instruments, including the Aussie Dollar.
The first major level we’d even consider selling would be 1.0266 which was 2010 high and may represent a nice pullback level. Don’t think ‘oh its too far’. The markets are over-exaggerating every move so it could happen in a flash. If you want a little lower, perhaps 1.0205 which was resistance for the first three months of 2011. Look for the targets we listed above and do not put one bullet in the chamber, or have one target. Split your position up so if it runs far, you can take profit and neutralize the risk at many stages. Case in point, we’ve been short the DOW since 11450 which we tweeted about. We’ve been short SPX since 1230 which we tweeted about. We’ve been short Oil since 89.45 which we Tweeted about. And we will hold as we are not seeing signs of this stopping, but we have taken profit at many locations…which we’ve tweeted about.
Look for intraday price action pullbacks on the 4hr to align with previous resistance levels and then look for your entry to get in short. Until the master stroke by some govt or sovereign entity comes in to fix these issues, the bleeding will go on.
One last thing to note – this is the fastest 7 day fall in terms of pips for the pair since the 2008 sell-off and since we started writing this post, the pair has dropped 85pips so something to keep in mind.
As mentioned earlier, the DOW got hammered with its largest losing day since 2008 and 6th largest % loss in history. After breaking the 2011 low at 11528 just 4 days ago, the index has lost almost 1000pts and is already getting hammered in after market trading down 270pts since the NY close.
We feel any rallies are simply selling opportunities to take this index lower. In terms of targets coming up, 10063 which was the Aug. 2009 high may provide some attempt at support, and the 61.8% fib at 9886 has a good history with the Jan 2010 lows, April 2010 lows and Aug 2010 lows all clocking in or near this level. But beyond this, 9673 and 9550 are certainly not out of the question so don’t cut yourself short by taking profits early. If nothing new comes in the European session to bring some confidence back into the markets, then expect selling through the European session heading straight for NY which will be a waiting game to see if any policy makers can give people a reason to believe in any sort of relief the titanic problems will be solved.
10669 becomes the first rally point where we’d look to add onto existing shorts along with 10895 so you have some options.
If you are interested in learning about these methods further, check out our Advanced Ichimoku and Price Action Courses for further training where you can also join a community of traders and get permanent access to our forum for continual education. For more information about our services, visit https://2ndskiesforex.com
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