Last week started with a move lower for this pair as the Chinese trade balance was showing a much lower than expected reading. The market anticipated a negative effect on the Australian economy by this Chinese slowdown. Later in the week the pair recovered after some very good Australian employment data caused the market to change its view on an RBA rate cut in May. A series of weak US data on Tuesday (retail sales), Wednesday (manufacturing / production) and Thursday (various) also helped to push this pair up almost 300 pips (!) from the low on Monday.
Because the FED said their decision on when to hike the interest rate would be data dependent, US news event now have a big impact on dollar strength, resulting in strong rallies or falls. On Friday the US cpi numbers came out as expected which halted the Aussie Dollar rally for now. With several Australian and US news events on the calendar for next week, it will be interesting to watch how this pair reacts. I continue to see fundamental dollar strength, even though it just had a bad week with 4 consecutive days of the Dollar Index dropping. I still see the FED hike their rates first of all the central banks.
Meanwhile, on the 4H timeframe, we can see the contours of a bearish Bat pattern developing. See the link under Related Ideas for another recent Bat pattern on this pair that played out profitably. Price has passed the B point and travelled 2/3 of the way from C to the potential reversal zone (PRZ). With this, the set up qualifies as a trade candidate and it goes on my watch list. When defining the potential reversal zone (PRZ) for a Bat pattern, we look at the projection of three harmonic levels. I: the 886 retracement of XA, II: an extended AB = CD pattern (in this case 1618 AB = CD) and III: a BC expansion (in this case 2000 BC).
This defines a clear zone, 45 pips wide, represented by the orange lines in the chart. Inside this zone we find the 500 retracement of the down move that started on January 15th and that ended April 2nd, which increases the edge of a reversal. Should this pair eventually go up to test the PRZ and reverse convincingly, I would enter short. SL goes 15 pips behind X. TP1 = 382 retracement of AD and TP2 = 618 retracement of AD. In terms of trade management, when TP1 is hit I would take profit on 1 position and roll my stop loss to breakeven, enjoying a risk free trade hunting for TP2.
There are 225 pips to be made (if this pair follows the script) and the trade has a reward – risk ratio of 3.7!