Where To Next For The Battler?

My observations below should be viewed as general advice and may not be right for you.

The Australian Dollar has gone from strength to strength since my last major post: http://fpmarkets.blogspot.com.au/2012/09/audusd-and-employment-numbers.html. I thought now would be an opportune time to update and show some interesting analysis. 

One of the major lessons I have learnt throughout my career is being flexible and heeding the underlying price action. Forecasting markets for the long term is close to impossible and those traders who hold firm long term predictions can often be blinded. In my analysis I try to identify key levels and patterns, and I then gauge the price action in relation to these setups. This is what I did in my last post looking for a bullish turn. This played out and you have to take one step at a time. Currently, I am seeing genuine strength in the Australian Dollar and we are now right into the major resistance zone. What does this mean going forth?

Given the patterns across markets, there is the potential for a genuine breakout and new trend higher for the Australian Dollar. The target for this could be as high as 1.20 but no doubt this will take time. My intention here is not to try and predict, but highlight a potential trading setup and plan. After such a strong run up, AUD may need to consolidate and possibly correct. However, the FED has sent a very loud signal that it will continue to devalue its currency. Indeed, Ben Bernanke stated that the central bank would probably hold the federal fund rates near zero at least through mid-2015!!! Given that Australia has some of the highest interest rates in the developed world, AUD will remain an attractive source for offshore flows in such an environment.

I have always been a fan of buying the strongest market and selling the weakest. The Australian Dollar has been one of the strongest currencies globally and thus I think it will be one of the biggest beneficiaries should USD continue its downtrend.

AUD Daily:

Since July last year, the Australian Dollar has been trading in a clear triangle pattern and range from $0.95 to $1.10. The fact that this currency has held up so well despite the European debt crisis, the global market turmoil, and the slowdown in China is testament to genuine underlying strength.

Triangle patterns are continuation patterns that are usually resolved in the direction of the bigger picture trend. Trends need time to consolidate before fresh moves higher and the triangle represents this period of consolidation. This is what we have seen in the Australian dollar which has been in a period of consolidation since the strong trend higher from 60c at the global financial crisis lows. There has been no confirmed breakout yet but the recent strength is certainly one to heed.

AUD Weekly:

This is the weekly Triangle pattern I am looking at. If we see a breakout to the upside, the targets are 1.10 firstly but more importantly up to 1.20. Note that the momentum indicator shown is also on the cusp of a breakout.

AUD Weekly Elliott Count:

One for the Elliott Wave counters. This is a big picture Wave 4 pattern with a further impulse and trend, wave 5, higher to come.

AUD 60mins:

For short term traders these are the potential options to get into this upward trend. Either looks for breakouts above the trendline or look for pullbacks down into 1.05. A break below 1.0420 i.e. last night’s low would be this scenario in jeopardy.

Some confirming evidence includes both the EURO and the Canadian Dollar as per below.

EUR Daily:

This market has clearly transitioned from downtrend into a new uptrend as the chart below shows. Price has now made higher highs and higher lows which implies a trend change. It is hard to believe that the EURO is on the cusp of a new bull market but you have to respond to the underlying price action.

1.30 is a meaningful resistance level and this may cap the rally in the short term. However, the trend is up and traders could look for continued pullbacks to play this move into the bigger picture targets of 1.32/1.33

USDCAD Daily:

A clear breakdown through a big support zone. The target for this is someway lower still.

In sum, there is the potential for a bigger picture breakout in the Australian Dollar. This is something to bear in mind if we continue to see strong moves above 1.06. It is hard to believe given the macro backdrop and the continued slowdown in China, but it is what it is. Having a plan to get into the trend is key and the 60min chart above shows clearly identifiable levels for traders. A risk to this scenario would be on a break back below 1.040.