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Trend Reversal Thermometer

Percentage Likelihood of a Top: 90%

How to Trade This?

AUD/USD Current Value: .8190

4/4/2007 11:06 AM

Sell on break of 0.8110

Stop .8190

Target 1 - .8027

Target 2 – We will revisit this target

Move to breakeven on decline below .8027

On Friday, March 30^th, we wrote -

“AUD/USD

Wave analysis indicates that the Aussie will extend a bit higher.  A measured objective is at .8243 and chart resistance is at .8180.  However, a major turn lies just ahead.  Both the risk reversal rate (the most extreme since November 2004) and long term wave analysis make the argument for a reversal in the next few weeks.

We will revisit this pair – it is likely that the opportunity presents itself to get a much better price in the week(s) ahead.”

Today –

The AUDUSD rally appears to have completed the 5 waves up from .7678 in a larger 5^th wave position.  The rally to .8191 makes a possible double top with the 1996 high at .8180.  There are 5 waves down from .8181 as well, which provides us reason to get bearish.  However with today’s powerful candle, traders need to be cautious of selling at current levels.  We recommend waiting for a break of 0.8110 which is the 100 hour SMA and yesterday’s low, especially since the weekly JPercentile Indicator has yet to turn downwards.  

Daily Chart

Charts From March 30

The 5^th wave (of the larger 5 wave structure from .7678) is in progress and will likely subdivide and extend a bit further before reversing.  Wave v (from .8038) would equal wave i (.7678 - .7883) at .8243.  The 1996 high at .8180 is also a level to watch.  RSI is also divergent with the recent high.  With a momentum extreme put in at the top of wave 3 – our confidence is high that this rally will lead to a reversal.  Watch the cited levels.   

The long term picture makes a strong case for a top to form in the next week or two.  There are 5 waves up from the 2001 low – so the next big move is most likely a decline back to the 4^th wave of one less degree (near .7000) before the long term uptrend resumes.  Additionally, wave 4 is a triangle.  Triangles end with a “terminal thrust”, which is what the current rally will likely prove to be.

The risk reversal rate has just declined from the mot extreme level since November 2004, when the AUDUSD topped out near .7950.  This evidence alone supports a reversal