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Technical Analysis: AUD/USD - Potential Reversal Formation ?

Posted by Akhilesh Ganti on Aug 26, 2013 8:00:00 PM

The decline in AUD/USD from its 4/11/2013 high of 1.0582 halted, maybe temporarily, on 8/5/2013 at 0.8848. The subsequent rebound has to be still viewed as a corrective move within the context of the larger bearish pattern, but a glance at a daily chart shows the potential for an Inverse Head & Shoulders reversal formation developing.

(click to enlarge)
audusd 082613 D
{chart:Bloomberg}

The Inverse Head & Shoulders is a pattern that can anticipate the reversal of a downtrend and is only confirmed after the following characteristics are met:

  • The price falls to a trough and then rises.- This forms the LEFT shoulder. 
  • The price falls below the former trough and then rises again.- This is the HEAD
  • Finally, the price falls again, but not as far as the second trough and begins to move higher making the third and final trough. 
  • Once the final trough is made, the price should head upward toward the resistance found near the top of the previous troughs which is also known as the "neckline". - This is completes the RIGHT shoulder.
  • A breach of that "neckline" should see the price gaining upward momentum which would confirm the pattern.

The Aussie appears to have already completed the LEFT shoulder when it bounced after making the 0.8999 low on 7/12 and the HEAD when it bounced off the 8/5 low of 0.8848. The recent move lower to 0.8932 on 8/22 and the rebound has the makings of the RIGHT shoulder. The "neckline" is the descending trendline connecting the 7/24 high of 0.9319 and the 8/19 high of 0.9233.

The key to this is that the price should not fall below the low for the RIGHT shoulder, which is at 0.8932 and would be deemed to be a support level and it must definitely not pierce through the low that formed the HEAD, in this case 0.8848, which is now defined as the KEY SUPPORT LEVEL. If it does then this pattern is negated and the downmove has re-asserted itself.

Prior to reaching the "neckline" there is mild resistance at 0.9074. If the price action were to breach the "neckline" then stronger resistance can be found at 0.9233 ahead of the KEY RESISTANCE LEVEL at 0.9345. Only a definitive breach of this level would signal that a meaningful upmove is in the offing. 

 

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