Australian dollar hits resistance

See the latest Australian dollar analysis here:

Macro Afternoon

If I was forced to trade today and I could only bet on the next 3 cent move, I’d put my money on the Aussie seeing 1.07 before 1.13. This view is based on my view of the technicals, the fact the Aussie feels like a crowded trade and Bloomberg TV seems to want to cover it every half hour today. Perhaps not solid fundamental analysis but for those of us who trade and invest for a living, there is one thing we usually hold true – that is, technicals ARE fundamental.

Technical trading indicators are one of the key inputs in our 5 Drivers model. How you use them and the weighting you place on them in your analysis depends on the time frame being looked at. I know that many people think of technical analysis in the realm of astrology. My own experience, together with studies I’ve seen, suggest that they work.

Now it is important at the outset to note that there are a number of different indicators and methods for technical trading. My personal proclivity is to never make an investment decision, give advice or strategise, without looking at my charts first. I have a fairly simple “technical toolkit” that I use it suits my personaility and trading style.

Specifically, while I draw on many inputs like Elliott Wave and Donchian Break out systems I am at heart a Fibonacci guy. So my key indicators are:

  1. Fibonacci Retracements and Projections
  2. Trendlines
  3. 3 Moving Averages
  4. MACD’s (Moving Average Convergence Divergence)
  5. Average True Range for placing stop losses and position sizing and
  6. Japanese Candle Sticks as representations of market price action – these really visualise what has occured in each time frame (bar) extremely well.

As a tip when trading and investing the key thing to do is match your indicators, timeframe and position sizing to your personaility and goals. The worst thing that happens is when you get your timeframes mixed up. Most traderes get killed when that happens.

The charts attached below I hope will help you understand the process I use when looking at technicals.

Now, obviously the quality of your analysis is what is going to make you, or save you, the most money. But it is important to build up a picture of the market you are in. As Jesse Livermore said in “Reminiscence of a Stockbroker”

I think it was a long step forward in my trading education when I realised at last that when old Mr Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend. 

In order to know what market you are in you have to build up a multi-timeframe of the market. To do that I start with really long term charts and end up down at the hourlies.

So let’s have a look.

The chart above is the AUD/USD monthly since 1971. It is clear that the period of the Aussie’s downtrend is behind us and has been for some time. Since that low of .4776 on April 19th 2001 we have been in an uptrend. So we are in a BULL market. We are outside the top of this trend channel so I’m automatically thinking it might be a little over cooked.

I then use my Fibonacci (Fibo) retracement levels  to look for “natural” levels that AUD might meet resitance at. The levels I, and most Fibo traders, utilise are the 38.2%, 50% and 61.8% levels.

For those who don’t know much about the  Fibonacci sequence its fairly easy to google but essentially its all about the relationships between the numbers in the series. 1,1,2,3,5,8,13,21,34,55,89 and so on. Each number is the product of the previous two numbers, and following number move in fixed ratios agains the ones previously. It’s a great sequence that appears as ratios all through nature. So for me there are “natural” levels of support and resistance.

But with this specific chart the key level is the 61.8% retracement which was, not coincidentally, 1 tick off the high this morning of 1.1013. We are having a selloff as I write and the Aussie is back at 1.0929 since I started this blog.

So we know we are in a long term bull market but we have probably hit very important resistance with the Aussie both outside the trend and hitting big Fibo resistance.

Let’s look at the weekly charts then.

In the context of this chart we see that the weekly uptrend since the bottom in 2009 confirmed the 2008 (Lehman induced) low. This is a broad trend and there is room all the way through to 1.14+ before the Aussie would break out the top. On this chart you can also see the MACD is high but momentum is not overcooked and that the Aussie average range (ATR) on a week is just under 3 cents.

The Fibo levels aren’t on this but the 161.8% level of the move from late 2009 before the Aussie stalled in the mid 0.9450 region is 1.13 and change. So on the weeklies the Aussies uptrend is intact, there is still room for a higher move but the ATR is also, at 3 cents, quite large. So there is scope for volatility.

Which leads me then to my daily charts.

Like the weeklies, the Aussie’s daily uptrend still has room to the upside but equally is very broad and even a deep pullback all the way to 1.00 would not threaten this uptrend. Fibo resitance, for the June to October 2010 rally before the period of consoilidation, comes in at the 138.2% region is/was 1.0985. Not far away from my long term monthly level which reinforces this zone to me as a key hurdle.

Equally, on this daily you will see that the MACD is at a level consistent with a slowdown in the pace of appreciation at best and what seems more likely given the build up of long and medium term resistance around the 1.10 level a pullback.

If I was trading, I’d then go to my hourlie chart to see what I thought on the day. But I’ll leave that aside for another day.

So on the basis of this analysis I’d conclude, just on the technicals alone that the Aussie has some stiff headwinds and is probably due for a consolidation or pullback. Today’s rejection of 1.10 when I started to write this blog could be the start of a move to consolidate, whether price or time.

But the key is that the AUD is in a long term uptrend. There is nothing in these trends that suggest anything other than we will see higher levels in the next year or more. So my $1,000 feels safe for the moment but longer term I wouldn’t be betting too heavily against the Aussie on a technical basis. Not yet anyway, the charts just don’t support it.

Disclosure: This post is not advice or a recommendation to buy or sell. Do your own research and consult an adviser before allocating capital.

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  1. The Elliottician in me loves that long-term chart from 1971. I can see five waves down, followed by an upwards correction over the past decade, which may have just ended with a throw-over of the upper trend line of the corrective channel. Time will tell. I wouldn’t trade on the basis of that guff, but it’s not an impossible scenario.

    In the same way that 9/11 marked a huge bottom in the US share market, the contrarian in me wonders if the Osama news just now might mark a huge top for the US share market.

    Given the very high correlation between the AUD/USD and S&P 500 over the past couple of years, food for thought.

    • I should have been clearer… throw-over would mark the end of the bullish correction of the past few years, so if that scenario holds, next move for AUD/USD would be down, in a big way.
      Time will tell. The Elliott Wave crystal ball is unreliable…

      • Deus Forex Machina

        Thanks AC

        I didn’t see that 5 wave down…I’ll have to have a look.

        As you would know, better then me, there is always that risk that if you can’t take out the 61.8% level (1.1014) that its just a big old retracement in the bigger trend…I did consider that but unfortunately the predictive side of Elliot Wave is an art I haven’t convinvingly mastered yet.

        Cheers and thanks DFM

        • Great post DFM. I wasn’t aware of that 0.618 retracement til your post, but my gut and own shorter term charts were telling me that this morning’s high could be significant. That 0.618 retracement makes it even more likely.

          The five waves down are Wave 1 from ’74 to ’76, then 2 til ’81, then 3 til ’87, then 4 til ’97, then 5 til ’02. Years are approximate since I am just reading off your chart and can’t be 100% sure.

          Following those 5 waves down, there’s a potential A B C correction up to this morning’s high, which if correct should lead to another 5 waves down. A goes to the ’08 peak, B bottoms in ’09, and C may have just ended.

          Very scary wave count. I hope it’s wrong!! But it’s certainly feasible.

          • Deus Forex Machina

            Yep on that basis it certainly is. And while I don’t want the Aussie to collapse overnight I’d like it to get back closer to 90/95 to take the pressure of businesses. If it does it in an orderly fashion ans in line with a bit of USD strength then inflation shouldn’t accelerate so its a win win for the economy.

  2. Great analysis and explanation DFM.

    Mine is similar, but not the same for stocks. I use monthly for the secular trend (i.e bull or bear market), weekly for the medium term trend and daily for short term, with hourly for entry/exit points.

    Timeframes are fractal in nature – this is 1 of 7 factors that I consider.

    I also use 3 moving averages, momentum and ATR, but I use ADX instead of MACD for my technicals, with candlesticks and trendlines for price analysis.

    Current conditions across almost all asset classes are suited to traders alone.

    going to be interesting how the risk markets digest the death of OBL. A USD short term rally and a move away from gold?

    Or is the 100 point upmove in the overnight DOW going to push through to the open later tonight Aust time?

    • Deus Forex Machina

      Fractals…your speaking my language Prince. Might have to get a picture of Benoit for my avatar 🙂

      i like your indicators and process, I’ll have to look at ADX.

      My guess tonight, next few days, would be that OBL’s demise sees risk on (I hate that term) but also that USD finds this as an excuse maybe to bounce of these pretty weak levels historical. No sense in that from an economic standpoint but who said markets were rational.

    • Mandelbrot was a genius in a realm of lightweights, his Misbehaviour of Financial Markets is a must read for any investor or economic student.

      I use ADX as a trend filter (with positive and negative crossovers and strength) with a 7 day period for short term trading and 7 week for medium term (1-6 months).

      Its also a great resource for setting up spread trades – the lack of direction (or bias towards one side or the other) analysis helps here.

      • While I’m on an Elliott bender (see above), I should say that Elliott wrote about the fractal nature of the stock market waaay back in the 30s.

      • Deus Forex Machina

        Cheers Prince…I’ll have a look at the adx because essentially every currency trade is a spread trade if i can cross through the usd rate…which of course I can

        And you are so right about that book…it is a classic. i have it here on my desk. Everyone who wants to seriously understand markets needs to read it.

        Interestingly, in the context of the conversation above with Avid Chartist, is Mandlebrot’s identification of Rob Prechter and Elliott Wave as a close cousin of fractals…too bad I can’t make EW theory work for.

        • DFM can I ‘borrow’ your chart for my own website? I’d like to put those Elliott wave labels on it, and post the result.

          I think you meant to say that you can’t make EW theory work for you, or maybe your own trading. If it’s any consolation, I can’t make EW work for my trading either. It’s great fun to play with, and at large timeframes (weekly, monthly or yearly charts) it makes some amazing calls, but I have never been able to make it work for me at hourly or daily chart level. If I want to be profitable, I just trade with the trend. EW is almost the opposite of trend trading, it is always looking for a reversal of trend.

          • Deus Forex Machina

            I did have a software program back in the 90’s called “advanced GET” it was brilliant at predicting…don’t know if it still exists…i lost touch when i moved from portfolio management to strategy

  3. Long term reader, first time commenter.

    Excellent analysis. I’m not a currency trader by profession (mainly because I don’t have the nads for it!!) but am interested in currency as a macro economic indicator and your analysis and given me some real clarity on the 1 year+ position of the A$.

    With the economic state of the US and the resource dependence of Asia is promising on a macro level but am still concerned on how the inflationary pressures will affect the everyman and how that may zap confidence in the Aussie.

    However, your charts represent the canary down the mine and the outlook is good fo the longer term and we can hopefully see any downward trend coming.

    • Deus Forex Machina

      Hi Dominic…thanks for the comment

      you are being too hard on yourself.

      IMHO you don’t need nads to trade currencies you just need a consistent process, the right time frame and most importantly the right position sizes and stops.

      No-one besides the Fed, BOE, ECB/Bundesbank, BOC, SNB and BOJ (big 7 central banks) are really big enough to control the free floating currencies for anything other than a few hours. It’s the worlds biggest market but in many ways the fairest because of this fact.

      That’s not to say everyone is suited to FX because you do need to know how to take a loss in order to survive otherwise with the leverage everyone uses you would lose your shirt quick smart.

      The inflation scenario is an interesting one because we should actually be having deflation after a crisis like this and the central bank stimulus is the difference in what would otherwise have been a recurrence of historical cycles.

      So the question is have we skipped the defaltion bit and gone straight to inflation (it always comes eventually)or is it really a lot about the USD. For commodities I think the USD has played a very outsized role for the AUD its just one of the drivers.

      Have a good one…DFM

  4. I wonder if you can run several associated data series at once…….

    Inverted DXY

    We could see the correlation between the Aussie and the wider landscape…..

    • Deus Forex Machina

      The correlation directionally is quite strong, although that is in price terms not in levels terms.

      So there is no oil up, aud up kind of lock step relationship the fact they are all moving in the same direction means that one of the dominant forces is probably the USD’s weakness.

      Likely also the benign nature of global growth at present, developed world not too hot nor too cold, emerging world doing ok.

      I’ll cut this answer into a small post for tomorrow with a pic or two.


  5. It seems to me the dominant factor in the financial markets – and in quasi-financial instruments/derivatives, such as commodity futures – is USD-aversion.

    This is taking on many forms and is becoming more pronounced and more rapid as time passes. This trend has the potential to become self-reinforcing. The ultra-low interest rates offered in the US deprive lenders of real returns, inspiring some to seek better returns in other assets. This has already had a depressing effect on the USD, reflected in rising prices for other currencies and for commodities, and accentuating the real-return losses derived from holding USD financial assets, inspiring more selling…and so on.

    Flight from USD financial securities is underway…..

  6. Referencing below, be aware, in last Thursdays column, i’ve added the following trading advice:

    My 2011 target on the Australian dollar and euro relative to the greenback were $1.10 and $1.50 respectively. Both look capable of being reached over coming days. This doesn’t mean we won’t see further US dollar weakness, but it does suggest the risk/reward balance is starting to move out of kilter. With this in mind I’d be trimming of long positions.
    I’ve been a long term US dollar bear, but from here I reckon it’s time to start being careful what I wish for.

    • Deus Forex Machina

      Nothing to say there but nice call Glenn and thanks for reading our blog.

      These levels feel a bit nose bleedy really and I guess the challenge for us as commentators/analysts is to figure out if the inevitable pullback from around here sometime soon is just a pullback or something more material.

      I’m concerned that even with this technical resitance the AUD will continue to be stronger for longer and that AUD could eventually trade 1.20/25 and eventually 1:1 against EUR or GBP.

      It’s not the forecast yet and I hope it doesn’t happen. We’ll just have to keep an eye on it.