By: Christopher Lewis
The AUD/USD pair fell a bit during the session on Wednesday as the “risk off” trade continued. The pair has been overly bullish for the longer-term, and this latest action was certainly countertrend. One of the biggest problems that new traders will have can be addressed in this chart as it is a perfect example, so I would be remiss if I didn’t address it now.
The trend exists for a reason. There are forces much larger than you involved in the markets, and they are what actually moves price in the end. When you look at the AUD/USD pair, there is no doubt that the trend is higher. I know that plenty of people will try to tell you things like “The trend is higher on the weekly and daily, but it is lower on the hourly and flat on the 15 minute chart.” Nonsense: If the trend is higher on the weekly chart – it’s higher. Period.
With this in mind, it is always more prudent to trade with the trend. The market can carry you much farther than you expect in these situations, and the profits are much easier to collect. It is much like the old axiom of swimming upstream versus downstream. However, many of you will not be patient enough to look for continuation signals in the trend. This chart just so happens to be showing one of those at the moment.
Hammer, 1.05, and the Trend
The action on Wednesday saw a drop initially, but a bounce from the 1.05 level. I like this because the 1.05 level is a nice large “round number” that the market can easily identify. The bounce formed a perfect hammer at this point, and everyone in the world is currently looking at this great signal. The classic signal is a break of the top of the candle to get long. This is exactly what I will be doing, and will not sell until we close below that crucial 1.04 level just below.
.png "AUD/USD Daily 3/8/12")
The move higher would more than likely reach for the 1.08 level. The area may or may not break on this run, but the fact is that it more than likely will give way sooner or later. The commodity trade is still strong, and the Aussie is the highest yielding currency in the G-10. Plenty or reasons for me to be long of this pair if we break higher.