Here’s a zoomed in forex setup to potentially enter the head-and-shoulders formation on GBP/AUD pointed out by Big Pippin last week.
Since Big Pippin’s post, I’ve been watching this pair carefully, and it looks like it has already broken the neckline to confirm a move lower. But I’m a bit cautious from jumping in because now it is testing an important support area between 1.8000 – 1.8200 that held strongly in November 2013 and January of this year. I think this area will give the bears a bit of trouble which is why I think a pullback is a better play for me at this time.
In the one hour chart above, I drew a channel on the lower highs and low, spotting a potential short-term resistance area. The falling top trendline lines up with the major psychological level of 1.8200, meaning it could draw in sell orders there if sentiment is still bearish on this pair. And with Sterling starting to lose its luster (dovish forward rate guidance from BOE and rate hikes seen as already priced in) and the Aussie gaining some steam (rate cuts are off the table for now), I think the odds of sentiment remaining bearish are good.
I’m still in watch mode for now for a retest of the 1.8200 area, but I do have the intention to enter as I think the potential reward on this trade is pretty big if sentiment continues in this direction; the next potential support area is the area around 1.7400 that held strongly as resistance between August and September of 2013.