Aussie on verge of breakdown

September 9, 2014 10:47 AM

Despite today’s lack of meaningful economic data, the U.S. dollar is extending its gains to new heights. The broad U.S. Dollar Index(NYBOT:DXZ4) nearly hit a four-year high in the mid-84.00s early in today’s U.S. session before pulling back. The greenback is among the strongest major currency pairs that we follow. The pervasive USD strength has led to a series of major breakouts over the past couple of weeks, and after holding out for months, even the Australian dollar is on the verge of succumbing.

Since late March, AUDUSD(CME:ADZ4) has been trapped in a tight range between support at .9200 and resistance at .9500. Over that time period however, the price action has carved out a large head-and-shoulders (see chart below) pattern with a neckline around .9200. For the uninitiated, the classic price action pattern shows a shift from an uptrend (higher highs and higher lows) to a downtrend (lower lows and lower highs) is typically seen at major highs in a chart. With rates trading below .9200 as we go to press, the pattern could be confirmed on the close of today’s trade.


Meanwhile, the secondary indicators are also supporting a shift in favor of the bears. For one, the MACD has turned lower below its signal line again, showing growing selling momentum. In addition, the RSI is at its lowest level in six months and is below the key 40 level that typically provides support during bullish trends. In this case, it looks like the RSI may be leading the potential breakdown in price itself.

While more aggressive traders may consider shorting AUDUSD on a close below .9200 today, more conservative traders are waiting for a break below the 200-day MA and 38.2% Fibonacci support at .9180. Either way, bears may eventually look to target the 61.8% retracement of the H1 rally at .8980 or the measured move target projection of the H&S pattern at .8950. After today’s price action, the medium-term bias in AUDUSD will likely remain to the downside as long as rates hold below the right shoulder at .9400.


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.