How Low Can They Go?


This move has been drastic. Often it is recommended to put these moves into perspective by looking at the macro picture. The AUD has fallen nearly 12 big figures in two weeks and is maintaining that level. However, anytime price out paces the 50 day Moving Average by an extraordinary amount we expect a retrace towards the mean or the average. We term this the rubber band effect. The more strength behind the pull the larger the band will snap in the other direction. The key, is in timing the recoil. Another tool traders will use is Fibonacci Retraces. The tool has inherent to it a certain amount of subjectivity, however, when used properly and consistently it can provide a great analysis of where price is likely to see potential points of weakness or strength. Price has touched the 38.2% Retrace level which if you look back to June was a pivotal point of minor consolidation. If the MA and Price are going to consolidate this may be the level where we see it. If not expect the next bounce to take us near .7700 or the 50% Retrace level.


After dipping below Dollar parity in December the CHF was the first currency to show weakness versus the Greenback. It has since lost 14 big figures to the Dollar. Again, we note the great distance between the 50 MA and spot which is indicative of the strength of the move but is also telling in regards to an eventual return towards the Average. We again use Fibonacci Retraces to identify key levels where price action may weaken and a slight retrace may occur. Looking back to the beginning of 2009 we see significant consolidation around this 78.6% Retrace level, the same level we are sitting at now. This may indicate that price action may begin to stall before attempting to take out 2009’s high just north of 1.19


The first observation that is apparent is the slope of the major moving averages and the order in which they are lined up in. A 200 MA above a 100 MA which is above a 50 MA is indicative of falling prices. The MA’s are also well separated indicating an existing trend. Once again we make use of the Fibonacci Retrace tool and see that price is sitting on the 78.6% level. This is an area where consolidation takes places. Compare this level to the levels above 61.8% and you can eyeball the difference between consolidation and true trending. On this pair price and the 50 MA are not as distant but still far enough apart that a period of consolidation may be expected. It would be a rather large drop for the GBP should it attempt to retrace its entire move that began in February 2009, but still quiet possible if we see these other pairs wipe out their 2009 gains, especially the EUR.

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