I think I may be embarrassing myself too much by saying that I used to love the video for Lionel Richie’s Dancing on the Ceiling. I use that corny video as an example of a great trading setup when I am talking to new FOREX traders. Of course I am referring to a break of a resistance level or ceiling that then turns into a support level or floor. I have had a lot of success with this technical setup and I am watching one right now on the AUD/JPY. Let’s see how long this pair dances on its old “ceiling†before taking off.
There are some fundamental factors at play on the AUD/JPY but I am going to look at my technical levels first. As you can see, in the chart below, the AUD/JPY has hit the 87.70 level 5 times in the last 6 months. If you count the early February retracement, you could even say that it has hit that level 6 times. Finally, following the 6th attempt, the currency broke through in July and has been retracing slightly towards support (former resistance) for a few days. From a fundamental perspective, I think this is an important formation. The AUD is a commodity currency and their largest trading partner is Japan. Currently, Japan is wholly dependant on imports for energy commodities like Oil and Coal. Coal is Australia’s largest export and oil is 6th. This means that this pair is going to be sensitive to rising energy prices. It will cost more JPY to buy AUD when prices rise, which is likely in the short term and therefore this pair is less likely to decline below our new floor and it could potentially rise significantly.
If we consider the 87.70 level a pivot point and use a Fibonacci retracement, based on the July rally, we can see a new target at 89.50, the 161.8% level. I have shown this in the second graph. This is almost 200 pips of potential movement and could be followed with a trailing stop. Fundamentals and technicals aside, I am timing my trade by waiting for a bounce off the 87.70 level. At the rate the pair is falling, I can see this happening by the Friday or Sunday/Monday session.
Source: Prophet.net
Source: Prophet.net
John Jagerson is a writer about and active trader in the Forex. His book, Profiting With Forex, published by McGraw Hill, will be released this July. This author also develops Forex education courses for INVESTools.com.