- Switzer Report - https://switzerreport.com.au -

The little Aussie performer

Posted By Gary Stone On In Economy | No Comments

I haven’t seen the term “little Aussie battler” used for some time when referring to the Australian dollar, so let’s give it another name, the “little Aussie performer”, well at least for the time being.

Despite the majority of the nation, including the Reserve Bank, doing their utmost to will the Australian dollar down against the US dollar, it seems to defy all and sundry and continue showing strength just when we all think that it will deliver our collective wishes and fall. Having risen from a low of just below 87c to a recent high of 94.61c, where might it head from here?

Inverse head and shoulders at a strong support zone

Another article and another technical analysis pattern, this time the inverse head and shoulders pattern. This pattern is highlighted in the daily chart below, which spans a year, by the three ellipses. The green ellipse is the ‘head’ and the magenta ellipses are the two ‘shoulders’. The ‘neckline’ between the two ‘shoulders’ is shown by the black descending trend line. Note that the right ‘shoulder’ has a higher trough than the ‘left’ shoulder.

Source: Beyond Charts

The inverse head and shoulders is a high probability reversal pattern that occurs at trend bottoms. It is the inverse of the head and shoulders pattern, also a reversal pattern, which occurs at trend tops. This particular inverse head and shoulders occurred at a strong support zone, which is shown by the bold blue rectangle that ranges between just below 87c and just above 88c. The support zone is determined by past peaks and troughs that occurred in the AUD/USD chart, which are not shown above but which I save on my personal AUD/USD chart.

The reversal in trend is confirmed when the price rises and closes above the neckline, which occurred on 6 March 2014 when the AUD/USD closed at 90.88c. This was the signal to buy the Aussie dollar against the US dollar, especially for those who hold US dollar assets and need to hedge their US dollar holdings.

On 6 March 2014 the AUD/USD also completed a five-day swing high close, which is one of the criteria that I use to determine when to hedge my US dollar portfolio that I trade on the NASDAQ. I use this technical analysis technique, in conjunction with a momentum indicator called the SIROC, because not every reversal and breakout occurs with a near perfect inverse head and shoulders, as occurred on this occasion. On Friday 7 March 2014, I published on our customer Forum that I had bought the AUD/USD to hedge a portfolio traded on the NASDAQ in US dollar.

So where to from here for the AUD/USD?

There is no doubt that the Australian dollar is in a textbook upward trend against the US dollar. It appears that the AUD/USD spot price is heading for the resistance zone above the current price, which is shown on the chart by the middle blue rectangle between 95.25c and just below 98c.

The current retracement should find support at the bottom upward angled bold red trend line and then continue rising towards the upper part of the rising channel and towards the resistance zone.

Of course, the AUD/USD might fall directly from current levels. If so, a trailing stop loss could be placed at just below 92c. If the AUD/USD continues to rise from here and makes a new high above the recent high of 94.61c, then the stop should be raised to just below 93c, which is where the currently forming trough is. For myself, I will be watching the SIROC momentum indicator that I use for a potential exit. Until then, I will remain long the AUD against the USD.

Gary Stone is the Founder and Managing Director of Share Wealth Systems. [1]

Gary Stone will be a guest speaker at this year’s Annual Australian Technical Analysis Association (ATAA) Conference in Melbourne from 9 – 11 May. Click here [2] to find out more about the conference.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report: