In case you were kidnapped, heavily inebriated or on prescription drugs for the last, oh say 33 weeks, the AUD/USD has been in an uptrend. On top of that, they recently did something no other central bank has done lately – raise their interest rates. This has separated them from the rest and added nitro to the trend. But, the question has to be asked, is there more to this uptrend? If so, should we be buying into AUD/USD for the rest of the week, now that we have hit hump day?
Statistically speaking – No!
Lets get into the numbers which suggest why we should not be buying.
Since March 6th of this year, the pair has had 31 weeks of price action behind it
Do we want to be buying as our general approach to the AUD/USD?
Verdict = Yes
Average weekly range (high to low) for those 31 weeks = 341pips
High value = 452
Low value = 135
# of weeks it has closed above the 341 avg. = 20 (65%)
Current weekly range = 314pips
Difference to the avg. = 27pips
Difference to the High = 138pips
Thus, if we were to this week hit or equal the weekly high, there is a potential for 138pips of profit…not bad, but downside risk is well over 200pips.
What is more interesting is how price has been behaving as of late. Thus, we present exhibit A which is the weekly chart on the AUD/USD
Notice how the pair has behaved in the beginning of the uptrend. The candles were closer towards the highs and much larger in high/low range. However as of late, the closes have been much closer to the opens with the open/close gains being smaller (current week excluded). Also, there are wicks or retracements on every single week (except one on sept. 11th week) since the week ending July 31st (over 9 weeks ago). Thus, statistically, 88% of the time the pair has retraced on any given week suggesting waiting for a pullback before entering has been the way to play.
Now take a look at exhibit B, a graphical representation of how many pips the pair has averaged (weekly basis) outside or above the 341pip avg. and how much below.
The weeks of the trend are from left to right with week 1 being March 6th. The numbers on the y-axis represent in 10s of pips (.001 = 10 pips) how many pips the week was able to post above the the statistical average.
Notice in the beginning of the chart, the line is above 0, showing the pair was producing weekly ranges .002 (20pips) outside the weekly average range from high to low. Not surprising as the trend has some good power once it clears the weekly 20ema. However, notice how the line falls off and on a week to week basis, the ranges have been getting smaller suggesting the trend is losing steam. Not necessarily that its changing, but just that we should expect to make less on a weekly basis out of the pair, particularly on an open to closing basis. Important to know.
Thus, considering that only out of 24 positive weekly closes, none of them since July 17th have closed above the weekly average (341pips) and the current week has already moved 314pips, do we really want to be adding on large positions around the current levels on the AUDUSD?
Verdict = No
Solution = statistics say wait for a pullback before buying.
Chris Capre is the current Fund Manager for White Knight Investments (www.whiteknightfxi.com/index.html). He specializes in the technical aspects of trading particularly using Ichimoku, Momentum, Bollinger Band, Pivot and Price Action models to trade the markets. He is considered to be at the cutting edge of Technical Analysis and is well regarded for his Ichimoku Analysis, along with building trading systems and Risk Reduction in trading applications. For more information about his services or his company, visit www.2ndskies.com.