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AUD/USD: Inverse head and shoulders?


priest

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Head and shoulders on the hourly is never a good basis to go on daily is much better, example was on oil which posted last night. With talks about russia may not sign a deal with OPEC and pressure coming from europe over Deutsche, i am not to shore right now going long of AUD USD is the best trade, not to mention DX still up despite the trump debate last night. 



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Correction to my intial post but I did mean the daily chart. This pair has been in a long term down trend for years and personally I am not sure how much lower it can go.I think it could heading up and breaking the multi year line of resistance soon?

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Thanks for the clarification  but I am not sure I see where the H&S is, again can you post a chart and show it?  Much easier to comment on a chart formation with a visual.  If it is where I think you may be seeing it then I most likely disagree but again I can't be sure until I see where you are seeing the formation.

 

As it happens I do have one technical scenario where a bottom may have occurred, just not with a H&S.  I give this a low likelihood at present given my expectation that USD will go on a major rampaging rally and carry all before it.  That said if commodities also go on a rally, as some think they will in a period of exploding inflation, then AUDUSD could also rally strongly.

 

If you post a chart I can give you a more complete view.

 

Cheers.

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Ah Ok, maybe you can post one later.  That wasn't the one I thought you might be referring to.  For me (and this may just be my personal approach) a true H&S formation (or at least one less likely to turn out false) comes at the end of a long move as a reversal signal, although you can get H&S continuation signals but I'd prefer to see a sustained change in direction first, which I don't believe we have seen yet.

 

Long term context

Before I look at the potential H&S formation I think you are referring to let me just put this in long term context as I see it.  The Monthly chart shows, I believe, a huge rally in AUD consistent with the huge commodities rally.  Given the Australian economy's heavy reliance on mining this is not a surprise and it helped them avoid the credit crunch recession (or partial recession as I believe this is not over by a long way!).  In EWT terms that rally could have been either an A-B-C or 1-5 motive (as annotated).  I favour the latter because (as far as I can tell not having sufficient historic data - still waiting for answers on this IG!) 2011 was an all time high so how can it be a retrace?  In any event after such a hard rally a hard drop is not surprising and that is what we are getting at the moment but I don't see the drop as a retrace (A-B-C) but rather another 1-5 motive wave down.  To your comment about how much lower can it go?  Well if the commodity rally is a bust and deflation sticks in then it can go all the way back down to 5000 or even lower if we get a global depression on...  

 

If we zoom in a bit on the current bear move on the weekly chart you can see a consistent trading channel down.  I would not say the upper line is particularly strong and it could be breached to form a wave 4 retrace up to about 8000 maybe even as high as 8450 (Fib 38% off the 2011 high) without breaking the bear trend as the upper channel line would simply be redrawn, but for that to happen we would need to see a fairly strong commodities rally (could be!  Especially if the inflation proponents are proved right.).

 

Note however the negative momentum divergence building on the Weekly chart and RSI/Stoch in over-bought/possibly coming out of high levels.  Indicators not a big factor at long time frame charts but is part of an overall narrative in conjunction with lower time frames.

 

Recent Daily price action

If I look at the move I think you are referring to then I see the following:

 

  • On the Weekly chart (BTW chart formations on the Weekly are strongest set ups), I don't see any sign of a H&S and the possible bottom is not convincing from a chartist POV.  There is a possible alternative 1-5 down (red labels) ending Jan 2016.  There is a possible double Top (Apr - Aug) in opposition to your possible H&S bottom.  All-in-all not a very convincing trend change set up in my opinion. 
  • On the Daily Chart I have 2 scenarios (other than the trend change):
    1. Either a wave 4 is done in April 2016 and we are in a coiling triangle retrace before a strong drop into wave 3 down, OR
    2. Wave 4 has not yet completed and we may get a rally up to a suitable turning point before a major leg down
  • However there is strong Neg Mom Div building on the Daily also and while USD may go through a short term period of weakness I don't think it will last long enough to push AUD very high (we would need a strong commodities rally to counteract any USD rally on this pair).
  • There are 2 possible Triangle formation for the retrace consolidation move (blue lines) so a breakout above these must happen to indicate a longer stronger rally in my view.

Having said all that your possible near term H&S could be an indicator of a shorter term rally in either of the scenarios I painted but not of a long term direction change in my view.  Still always good to keep an eye on alternative possibilities so good spot and challenge.

 

I still expect a further drop in the very short term to either the Fib 62% or the lower Triangle line (see 4 hour chart).  A rally from this point brings up a completion of the retrace move but a break of the Triangle would suggest the retrace is done and we are heading lower fast.

 

here are my charts, look forward to thoughts and challenges:

 



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Again depending on the direction of the dollar, we could see this resume its current trend, with main daily bottom triangle trend line being broken, similar to EUR-USD or possibly shoot towards the upper triangle and head lower again. Right now either is possible. But this currency is commodity drive as seen after the January-February commodity massacre earlier this year. Therefore this pair may even break higher, before heading lower again if the commodity cycle turns down again, which could be exacerbate the FTSE100 mining equity stocks as well, not that equities is my interest these days.

Chart below.



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ENDED UP POSTING TWICE, MIA CULPA

Again depending on the direction of the dollar, we could see this resume its current trend, with main daily bottom triangle trend line being broken, similar to EUR-USD or possibly shoot towards the upper triangle and head lower again. Right now either is possible. But this currency is commodity drive as seen after the January-February commodity massacre earlier this year. Therefore this pair may even break higher, before heading lower again if the commodity cycle turns down again, which could be exacerbate the FTSE100 mining equity stocks as well, not that equities is my interest these days.

Chart below.



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Again as stated in the DX post, unless their is a significant sell of the dollar we have the same scenario as of yesterdays post. 

1st: Since we failed to break the rising trend line which has been acting as support since January of this year their is a possibility that we could reattempt the upside of the triangle, which if commodities in general rebound tomorrow and next week then this could well happen, but the dollar will have a very heavy influence. 



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Agreed  with the Triangle line holding support we must expect another rally towards the upper Triangle line.  Commodities are not rallying as such (e.g. Copper has been in a down trend for a couple of days, however it may be about to stage a rally...).  I suspect the rally in AUD was off the back of positive China data, which also caused a rally in miners on the FTSE100.  This may be short lived...  We also may be about to see a general rally against USD with EUR and GBP poised for a bit of a recovery and DX potentially retracing back towards the Daily/Weekly Triangle line it broke through recently.  This would support a continued AUDUSD rally for a while at least until USD once again dominated proceedings.  Finding the top of this rally could be an excellent set up for the beginning of a Shorting campaign on this pair and it would most likely coincide with turning points on EURUSD and GBPUSD and possibly also USDJPY, which I expect to retrace in EWT1-2 during this period.

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So many where heavily getting exited with AUD USD especially across the twittersphere, fair enough i myself was also suspecting similar views, the technicals assumed this and the Bulls after Australia stated they where happy with the current levels of their own currency and Jobs data was expected to be good, until of course a massive blow happened during the early asian session. This does not mean the triangle was not valid, because you will have overshoots.  I would also like to highlight that CFTC data also suggested that while speculators where bullish, commercials have been massively bearish. Therefore the next obvious area to watch is now the opposite side of the triangle and see what the price action suggests. If my analysis is correct with the whole ABC scenario on the 4 hour, then the market could become very bearish with the assumption of another RBA cut.

Feel free to share alternative views of course. China will also dictate the state of play in terms of its own economics. 



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AUD USD is one of my specialty markets of which i have always liked to trade, despite its selfish limited, non-trending market. However i am still positively convinced that we could see this head lower. Fundamentally if Chinese data was to worsen, RBA talks of cutting rates or more easing and commodities head lower, then the bias would remain bearish. The triangle break is KEY for me. Watch closely.

 

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So far so good with the AUD USD, but i think we should hold our breath until the triangle break occurs. I have just popped a chart of high grade copper as since Australia is a very heavy producer 4th biggest in the World and you will find a very similar correlation. However since copper has been rallying, and net-longs on aus:usd also averaging either way, i think we should trade cautiously with this one.



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  • 2 weeks later...

Been watching this potential make or break on aud usd. Currently hugging a rising trendline. We have yet to see if aud usd will make a close above the triangle, which most likely wont happen until the Trump Election. Although AUD data is looking decent and no talks about rate cuts in the medium turn, one would probably suggest that bulls may be having the upper hand. However depending on the DX, if the dollar rallies then i would expect this pair to follow suit.



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Ok got you.  Initially I was minded to say AUDUSD will go down off the upper down-sloping Triangle line given the number of times it has failed to breakout however the closer price gets to the end of a triangle pattern the less valid it becomes so I am minded to think the upper resistance zone (and the top being the top line of a right angled rising triangle) is more relevant and as this intersects with a shorter term rising trendline (pink) and a down-sloping weekly trendline (purple) at the top of the resistance zone and as the Fib 88% I suspect that this is the last ditch for Bears.  A breakout here brings up the scenario of a higher wave 4 (could be up to 9000).  If repulsed the market will probably run down to the rising triangle line support again and then it depends on the USD scenario in play after the US election.  Like many markets it is too hard to play it with the US election looming large.

 

If trump wins expect a drop in USD followed by an eventual USD rally as stocks and bonds begin their long slide (that could take some time) so that would support AUDUSD rally to a bit and then fall (depends on the start point on Wednesday morning as to how this would play out with this pair).

 

If Clinton wins we should get a short term rally in USD dropping this pair down followed by some weakness in USD until the stocks rally is done and the fear kicks in again.  This could bring up the higher wave 4 prior to a major run down as USD goes on a rampaging rally.

 

So net it all depends on the US election initially at least.

 



 

 

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Looks like AUD USD working out very well and some rumours over at MG-S where trying to short aud usd and are re-attempting it again. I dare not say if we are going to start plummeting all the way down, but you could argue that the retrace is finished and we are now performing a simple impulse move down. 



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  • 2 weeks later...

AUD USD must be the pair that tested by patience for the last year and i have to constantly switch from bear to bull almost every other week,sometimes every other day, but looks like the bears are in action and a huge swing in COT data. But since markets dont move in one direction unless your a flash boy, i can see a small retrace coming against by orange decending trend line. Which for me just looks like another opportunity to possibly sell into. But without doubt we could see a bit of a breather in the medium term but that seems way of the radar for now.



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