Why AUDUSD is Likely to Trade Lower
We observed from Feb 2009 to May 2012, AUDUSD has been trading along an uptrend line. This line was broken on May 2012, indicating that the bullish trend was over and we see that price has transition into a sideways consolidation between 0.9500s and 1.0830s for a while. This sideways phase was over when price broke below 0.9500 on June 2013 and traded lower.
We note a major Head & Shoulder Trend reversal pattern formation, which will signal a bearish trend upon a price breakout on the down side. It is important to note that this Head and Shoulder Pattern is also clearly visible on the Weekly Chart. Weekly charts are known to the drive decision making of asset managers at the institutional levels. Therefore we project that a huge amount of capitals flows will be triggered, should this Head and Shoulder Pattern be convincingly broken, driving further bearish price action in AUD/USD.
There are 2 ways of drawing a Head and Shoulders Neckline. The first way is by drawing the slanted Neckline at box 3. For the more conservative traders, we can draw a Horizontal neckline at 0.8680. We note that the weekend close of AUD/USD has slightly broken both the Slanted and Horizontal neckline.
Based on the all the evidence so far, we project that a convincing breakout is likely to happen and signal a clear bearish trend for AUDUSD.
Taking Profit:
Take Profit Level 1: 0.8400
Take Profit Level 2: 0.8200
Take Profit Level 3: 0.8000
Beyond Level 3: As this is a major chart pattern, we can consider retaining a small position, after taking profit at Level 3, as there is a chance that the Bearish Trend bring the prices even lower than conventional technical projections. Of course time is required for the price to develop and work through these levels.
Risk:
There is an above average risk of a false breakout or strong pullbacks, as there were little retracement seen in the sharp price drop from 0.9360s to 0.8720s (See Box A). This is why also we would prefer to enter short only below 0.8680. To further handle this risk, it might be a good idea entering in small position sizes and gradually increasing position only when price convincingly trades lower.
Stop Loss:
Given the above average risk of a short term retracement, a tight stop loss slightly above 0.8765 is recommended.
Plausible Fundamental Driver of Bearish Price:
General market expectations of US Interest Rates to increase versus expectations of Australian Interest Rates to hold, leading to the unwinding of leveraged USD/AUD carry trades.
References:
Weekly Charts> www.marketsmith.com/...weekly-stock-charts/
Head & Shoulder Patterns> www.investopedia.com...technical/121201.asp
Carry Trade> www.investopedia.com...x/07/carry_trade.asp
We observed from Feb 2009 to May 2012, AUDUSD has been trading along an uptrend line. This line was broken on May 2012, indicating that the bullish trend was over and we see that price has transition into a sideways consolidation between 0.9500s and 1.0830s for a while. This sideways phase was over when price broke below 0.9500 on June 2013 and traded lower.
We note a major Head & Shoulder Trend reversal pattern formation, which will signal a bearish trend upon a price breakout on the down side. It is important to note that this Head and Shoulder Pattern is also clearly visible on the Weekly Chart. Weekly charts are known to the drive decision making of asset managers at the institutional levels. Therefore we project that a huge amount of capitals flows will be triggered, should this Head and Shoulder Pattern be convincingly broken, driving further bearish price action in AUD/USD.
There are 2 ways of drawing a Head and Shoulders Neckline. The first way is by drawing the slanted Neckline at box 3. For the more conservative traders, we can draw a Horizontal neckline at 0.8680. We note that the weekend close of AUD/USD has slightly broken both the Slanted and Horizontal neckline.
Based on the all the evidence so far, we project that a convincing breakout is likely to happen and signal a clear bearish trend for AUDUSD.
Taking Profit:
Take Profit Level 1: 0.8400
Take Profit Level 2: 0.8200
Take Profit Level 3: 0.8000
Beyond Level 3: As this is a major chart pattern, we can consider retaining a small position, after taking profit at Level 3, as there is a chance that the Bearish Trend bring the prices even lower than conventional technical projections. Of course time is required for the price to develop and work through these levels.
Risk:
There is an above average risk of a false breakout or strong pullbacks, as there were little retracement seen in the sharp price drop from 0.9360s to 0.8720s (See Box A). This is why also we would prefer to enter short only below 0.8680. To further handle this risk, it might be a good idea entering in small position sizes and gradually increasing position only when price convincingly trades lower.
Stop Loss:
Given the above average risk of a short term retracement, a tight stop loss slightly above 0.8765 is recommended.
Plausible Fundamental Driver of Bearish Price:
General market expectations of US Interest Rates to increase versus expectations of Australian Interest Rates to hold, leading to the unwinding of leveraged USD/AUD carry trades.
References:
Weekly Charts> www.marketsmith.com/...weekly-stock-charts/
Head & Shoulder Patterns> www.investopedia.com...technical/121201.asp
Carry Trade> www.investopedia.com...x/07/carry_trade.asp
