AUD/USD Setup?

BarroMetrics Views: AUD/USD Setup?

In Nature of Trends,  I speak about Forecasting Patterns – patterns that take place in one timeframe but forecast a change in trend in the next higher timeframe. For example, the pattern appears in the 5-day swing (weekly trend) and forecasts a change in trend in the 18-day swing (monthly trend).

One generic category of Forecasting Patterns are the Horizontals: the Horizontal Terminal and Horizontal Complex Terminal. The patterns represent a specific form of sideways activity. Figure 1 shows the normal Horizontal Terminal.

That’s the background. Let’s turn to the AUDUSD.

The AUD/USD is exhibiting a variation of the Horizontal Terminal.

In Figure 2, I have noted in the AUDUSD chart:

  • 5-day swings and
  • The labels, ‘X’, ‘A’, ‘B’, ‘C’ and ‘D’. (Notice though that the pattern varies slightly from the norm: ‘B’ is slightly above ‘A’ and ‘D’ is slightly below ‘C’. I point this out to show that it’s necessary to understand the principles behind the pattern rather than just looking to match them).

To complete the pattern, we need non-acceptance above .8541 (Maximum Extension) and then a bearish directional close below .8437.

[I’d define:

  1. Acceptance above .8541 as two consecutive closes above it and with at least one of the two being a bullish directional close. And
  2. A bullish directional close as a close no lower than in the top third of the range and open no higher than in the bottom third of the range. The range must be at least normal. Currently this means the range should be at least 80 pips.

That’s the setup (entry pattern); what about the context?

The context shows we are in an environment where a 13-week retracement (quarterly trend) is likely. Generally a retracement in the 13-week will result in an 18-day change in trend – something a completed 5-day Horizontal Terminal would indicate.

  • We have a statistical time and price window for a 13-week line change.
  • We are at 18-day resistance.
  • We are at 5-day resistance.
  • Seasonals have a high due early in the second week of September and
  • Linear Cycles confirm the seasonals.
  • (The time window begins Friday September 4 and ends on  Friday Sept 11).

So we see a setup in the appropriate context. If the short is triggered, my preferred stop is above the maximum extension.

What about the bullish alternative?

If the market accepts above the Maximum Extension,  .8541 (i.e. we see an upside breakout), I’ll stand aside. Given the position of the 13-week swing line, I am unwilling to buy this market without a 13-week correction.

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FIGURE 1 Horizontal Terminal

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FIGURE 2 AUDUSD Horizontal Terminal

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