The Aussie dollar has hit a new low – here’s how I’m playing it

The euro crisis seems to have no end, and has been getting the lion’s share of coverage – alongside the spectacular bursting of the China stock bubble. So as a respite, I thought I would follow up on my take on the AUS/USD cross which I last covered on 26 June.

The trading lessons currently provided by the Aussie are clear. They bring into sharp focus why my tramline method can be used very profitably by many traders who want a simple easy-to-apply system.

On 26 June, I showed that the market was very probably near the start of a wave 5 down. I based that assessment, as seen below, on the form of the wave pattern.

Australian dollar spread betting chart

The very long and strong bear move from last summer to the January lows is clearly a third wave simply because it is long and strong. The relief rally is then a wave 4 and the current wave is wave 5. So far, so good.

Commodity prices have tumbled

The Australian dollar is basically a commodity currency (as is the Canadian dollar), and its value is very much tied to commodity prices. One of its biggest exports is its iron ore shipments to China. It could be said that great parts of the new Chinese cities have been built from Australian iron ore which has been turned into steel.

In recent days, iron ore prices have slumped yet again as China’s economy is teetering. Crude oil prices have also taken another tumble, and gold remains firmly on its launch pad (or even going backwards!).

With that negative input, the Aussie has sold off in sympathy and has declined into new low ground to confirm my wave 5 count. Here is the updated daily chart:

Australian dollar spread betting chart

In fact, there was a terrific trade opportunity prior to this latest plunge that was captured perfectly by my method.

Below is the hourly chart I showed last time. After the five down, there appeared a lovely textbook A-B-C and the market was heading towards my lower tramline.

Australian dollar spread betting chart

Not only was there the tramline pair as shown, but I could also draw a fine wedge. My lower green wedge line has multiple accurate touch points and was broken right after I wrote the 26 June email. That was an excellent short trade entry.

But another presented itself when the market rallied to plant a textbook kiss on the underside of that line.

Australian dollar spread betting chart

This one offered an even lower risk trade because the protective stop could be placed quite close to the line. So there were two excellent trade entry points available.

Don’t panic

The important point is that both of these trades could be planned in advance. Having time to plan and evaluate your stops is very desirable – that way you are not panicked into a trade, which usually turns out badly.

That is one of the major features of my tramline method. When you have drawn in reliable tramlines (and wedge lines), you can make projections of where the market is likely to reach.

Taking the kiss as an example, here is the hourly chart. The green wedge line support was broken on 26 June. When it made its low, it began a normal rally back to the line which it kissed on 1 July, allowing two to three days to plan your trade.

Australian dollar spread betting chart

You had plenty of time to enter a limit order which was executed while you were probably asleep. That is what I call relaxed trading!

Now, we are in a fifth wave and this is the final wave of a five down. When trading fifth waves, you must keep an eye out for a major reversal which will come at some point.

Can we find any likely targets where profit-taking could take place?

Here is one clue provided by the weekly chart below. Currently, the market is heading for the Fibonacci 78% retrace of the entire rally from the 2008 low to the 2011 high. That would be one possibility.

Australian dollar spread betting chart

But currency market trends have a habit of acting like the Duracell bunny – they just keep on going.

Because stock markets are on the slide, I plan to cover some major stock charts on Friday. Make sure you tune in then!