Rhody Trader

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I was just flipping through the charts and spotted an interesting development for daily AUD/USD. As you can see from the chart, the Bollinger Bands have gotten very narrow. In fact, they have not been this narrow on a relative basis in quite some time. That tells me the market is ready to make it’s next big move. (click the image to see the full sized view)

Alas, while narrow Bands can tell us that the market is likely to soon start a major directional move (volatility expansion), they don’t do much for us in terms of providing directional clues. For that we need to employ other analytic methods.

Actually, a go with strategy is generally the best approach. Sometimes, though, you can get a view on which way the break might go and how far it probably would run. I include the monthly version of the AUD/USD price distribution chart to help in that effort.

The daily candle chart shows that AUD/USD has really failed to continue to make progress higher of late. Intraday new highs have been made, but no new closing highs have been put in since the late February peak. That shows up on the distribution chart too. The .9550 area was rejected in April.

This month so far the action has been mostly within the limits of April’s primary value zone, as highlighted by the green lines. In all likelihood it is going to be a daily close beyond the limits of that range which starts the Bollinger Bands widening out once more. Given the fact that the highs were rejected recently, while the lows from April were rejected at the very start of the month, it seems likely that a trip lower is in the offing. Not that it’s a sure thing by any stretch.

The other thing that draws me toward playing the downside rather than the up is the potential gain. There is very clear and not too far off resistance if the market attempts a break higher. As such, a breakout might only have about 100 pips in it, whereas the downside could have 200+.

What would be a really interesting play would be a fake-out breakout where AUD/USD rallies out of this band, but then fails and reverses out the bottom. Those types of moves are often the most powerful.

Hmmm. I think I’m feeling a breakout fade trade coming on - if we get the breakout, of course. It could be done with a very good risk/reward.

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