Earlier this year, the developing chart pattern for the Australian dollar suggested a $1.18 target. This failed to develop, so what went wrong?
The breakout from the symmetrical triangle pattern failed. This pattern failure was common across a range of stocks and indexes at this time and reflected a broader pattern in market movements.
Chart patterns usually have a high probability of success. Some patterns have success rates in the order of 70 percent and 80 percent, but this still leaves room for failure in up to 30 percent of cases. The symmetrical triangle chart pattern has a 50 percent probability of success. These are marginal odds at best, so the failure of this pattern in the Aussie dollar chart is not a big surprise.
We noted at the time that the $1.18 target was a technical target derived from the logic of the chart pattern and that it ought to be treated with caution because it seemed extreme. The essential trading feature of all chart analysis is the listing of the trigger levels that show the pattern has failed. The failure to move above $1.08 showed the breakout from a symmetrical triangle pattern had failed and it was time to cover long positions.
Traders do not apply chart pattern analysis with blind obedience and adherence to the target levels. Chart analysis is about probability frameworks, not prediction.
The subsequent development of the price behaviour on the Aussie dollar chart has provided a different structure for analysis. Upside resistance is capped at $1.10. Significant resistance is found at $1.08. This creates a narrow resistance band between $1.08 and $1.10. There is a high probability this resistance band will cap any rally behaviour in the Australian currency. But the persistence of this level also means that any move above $1.10 and the Aussie dollar can move up very rapidly towards the original $1.18 target.
How so? The Aussie dollar has developed a broad trading band. The lower edge of the band has support near $0.94. The strongest support is near $0.96. This narrow consolidation band mirrors the narrow resistance band.
The apex of the symmetrical triangle is located near $1.02 and this provides a middle point in the broad trading band. The width of the upper section of the trading band is 0.08 and this value is added to the breakout above resistance at $1.10 to give a potential $1.18 target. However, the nature of the breakout needs to be assessed before the target can be confirmed.
The most probable outcome is continued sideways trading with a broad oscillation around the midpoint at $1.02. Trade the long side from $1.02 to $1.08. Trade the short side from $1.02 to $0.96. This is a rally trading environment. A move above $1.10 or below $0.94 signals the start of a trend trading environment.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
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