In the days before ubiquitous computers, floor traders needed a simple way to calculate intraday levels of support and resistance. Enter pivot points.
Pivot points use the high, low, and closing price of the previous day to project support and resistance levels for the current day. For instance, the central pivot point is calculated as the (high + low + close) / 3, or effectively the average price of the previous day. As a general rule of thumb, if price opens above this central pivot point (often called the “fulcrum” of the day’s trade), it is more likely to trend higher and vice-versa.
Daily pivot points are still one of the most widely-used technical indicators, but like all technical tools, pivot points are even more reliable on longer-term timeframes. Though they don’t come into play often, yearly pivot points are among the most effective tools in a technical trader’s arsenal.
Looking to the AUD/USD, the yearly pivot comes in at .9450, the exact area that has been putting a ceiling on the pair for more than three months now. A few weeks ago, the AUD/USD tried to break above its yearly fulcrum, but veiled threats of intervention by RBA Governor Stevens pushed the pair back down, much as we saw from the RBNZ last night. After another run toward .9450 yesterday, rates are once again being rejected, despite ostensibly bullish news out of China, Australia’s biggest trade partner.
Source: FOREX.com
Beyond the monthly pivot point, there are some other technical signs that the AUD/USD may dip from here. For one, the pair is currently showing a Dark Cloud Cover* candlestick formation, showing a shift from buying to selling pressure and increasing the likelihood of a near-term top. Meanwhile, the RSI indicator formed a clear bearish divergence at the recent highs, suggesting that the bullish momentum is ebbing.
Of course, the Aussie may be able to muster enough strength to break sustainably above the .9450 level next week, but until it does, a bearish bias is appropriate in the short term. The most immediate level of support is at convergence of the 50-day MA and previous lows in the .9330-50 zone, but if that floor is broken, a continuation down toward the 200-day MA around .9200 may be seen.
About the Author
Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association. You can reach Matt directly via e-mail (mweller@gaincapital.com) or on twitter (@MWellerFX).