The Aussie and Kiwi should be interesting pairs to trade over the next couple weeks due to the increase in volatility and the current disconnect between the U.S. stock market and the U.S. Dollar. With the sequestration scheduled to come into effect tomorrow and little optimism that the Republicans and Democrats will reach a deal, it could have a positive affect for both equities and the USD.
Let's look at some charts. This is a daily chart of the NZD/USD with the 200 SMA and 200, 100, 50, & 20 EMAs. I want to draw your attention to the trendline support, which was broken slightly (which trendlines often are because muppets typically put their stop losses and sell stops below them.) Price moved right to 0.8225 (study price reaction at 00, 25, 50, 75 levels) where the 200 EMA helped provide support. Price then rebounded to the open of the large down candle (2/26). Price often encounters new supply and demand at the opening/closing price of daily candles.
So what does this mean? The trend on the 4 hour chart is down. Trend continuation on the 4hr chart and a breakout of the channel to the downside on the daily chart is the scenario that makes the most sense to us. Remember, we've had a small break of the channel to nab the sell stops and stop losses, then a rip up to squeeze the new traders who entered with sell stops. A rip down would frustrate the most amount of traders at this point, that's why we consider it the most likely scenario.
Even though we have developed a bias, it's important to note that we are often wrong - just as all traders are. The important thing is to not get hurt badly when we're wrong and to let trades ride and make a lot of money when we're right. So what's the purpose of performing analysis when we're wrong a good deal of the time?
Dwight Eisenhower said it best, "plans are useless, but planning is everything."
If you understand the current chart and the possible scenarios, it makes it easier to adjust for the constant changes in market variables.
On to AUD/USD. We've noticed that a lot of "high profile" traders on twitter have been saying that 1.0150 is support on AUD/USD. Similarly to the situation in NZD/USD, there are probably already stop losses and sell stops accumulating below 1.0150. There will probably also be buyers at 1.0150. We think the most likely scenario is a move to 1.0150 (buyers enter), then a move lower to squeeze the buyers, trigger stop losses, and trigger sell stops. After that's done, a short move higher to squeeze the traders who entered with sell stops, and then a move lower to parity.
This is one of the most common scenarios we see played out in the market. Day after day, week after week, month after month.
Once I can pin point bids and offers on a chart and know the levels where traders should get hurt, it becomes easier for me to find entries with great risk to reward ratios.
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