Talking Points
-AUDUSD fundamental case for a counter trend trade
-Framing a trade using Fundamentals and entering using Technicals
-Be quick in identifying market sentiment
In April, the Australian Dollar found itself in a perfect storm of negativity. On the home front, a sharp downward revision in Chinese economic growth expectations spilled over into fears of lost export demand and weighed on RBA policy bets. On the global side of the equation, the Federal Reserve began to introduce the concept of “tapering” its QE asset purchases, driving liquidation across the risky asset spectrum. By mid-May, the Aussie lost its grip on parity with the US Dollar. By August, it was trading below the USD 0.90 mark at levels unseen in three years.
Around this time, I began to think the move was over-stretched and vulnerable to a correction. After a heavy surge, the weekly build in speculative net-short AUD positions began to slow. A string of better-than-expected Chinese economic news releases arrested the slide in growth expectations. Fed officials were doing their utmost to talk down the volatility they themselves unleashed. Simply put, the Aussie looked to be running out of fresh bad news, and it seemed only a matter of time before profit-taking would begin to sweep the trade.
A bullish Piercing Line candlestick pattern on the weekly chart offered the technical trigger to put this fundamental view in motion and I entered long at 0.9189. After bumping along the bottom for a few weeks, the Aussie launched an impressive rally, reversing half of its losses by mid-October. Throughout this time, I maintained that the overall AUD/USD trend was bearish and the long trade purely tactical, aiming to take advantage of a bounce before reverting to the short side. When the time came to switch sides arrived however, the plan unraveled.
I booked profits on the trade at 0.9463 as the pair began to turn and a week later noted the bearish reversal chart setup that would ultimately mark down trend resumption. However, I was simply not mentally prepared to jump in short. The long position from August took weeks of research and fine-tuning. This shaped a stark world view that became difficult to swiftly abandon because of the sheer time spent formulating it. I remained on the sidelines and watched as the Aussie resumed dropping, returning to Augusts’ lows by year-end.
The lesson to be had here is straight-forward: agility is critical even for long-term traders.
Written by Ilya Spivak, Currency Strategist for DailyFX.com
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