AUDUSD 07-31-2008 II

My, the AUDUSD has certainly been accommodating! I had planned to write a follow-up today on the necessity of changing our plans in the light of new information. The AUDUSD’s price action in the past 24-hours has made it relatively easy.

Yesterday I was looking for a 5-day RePo (weekly trend signal) setup and entry. I made the assumption that if we did see a 5-Day Repo, then acceptance below .9337 would mean that the 18-day trend would be over and in this event, it was probable that the 13-week trend would also change.

The price action also highlights one of the reasons I ask you not to take this blog as a ‘tipping newsletter’ : because I may not make clear the assumptions under which I am making a comment.

In this case, my assumptions were that if a 5-D RePo did occur, it would drain necessary buying power from the 18-D to stage a meaningful rally: since buyers would have stepped up to buy on the RePo, the subsequent breach of the 18-D low and stop out (of some of the long positions) would have taken away some of the ammunition needed to sustain the next buying attempt.

But yesterday there was no RePo. Once we had acceptance below the Maximum Extension .9400, the potential RePo signal was no longer in play (See Nature of Trends).

Figure 1 shows the current condition. There are two equal probabilities on the upside:

The market will hold the .9327 level and close above today’s current high (.9399) with bullish conviction. Or,
The market will breach the .9327 18-D support and close above today’s current high (.9399) with bullish conviction. (In the process giving an 18-D Repo).

Of the two scenarios, I prefer the latter. Should it occur, I take a half-normal position. Note that in this case, because the ‘18-D ammunition is still dry’, I’d take the view that breach of .9327 would not lead to a 13-W trend reversal.

In my trading, I hold the view that everyday brings in fresh information, and each day we need to review the impact of the new information. This is why I argue for a written as well as a mental preparation (in the form of visualization). If we re-write our scenarios (as against ‘copying and pasting’), we come to the trade with a fresh picture - one that may produce a fresh insight. One of the greatest dangers to our wealth is the assumption that because the market is moving in our favour we can relax and break our daily routines.

I’d say that whatever the market does, we need to commit to the daily routines that have proven successful.

Note that I have not covered the possible bear scenarios because they are not relevent to the theme of this blog.