Analysis: Trading the Anticipated Turn in AUD/USD
AUD/USD has been under steady pressure for the last month and traded to its lowest level in over a year and a half on Wednesday. This decline has been very impressive in terms of its veracity and scope, but a confluence of factors suggests the current decline may soon be reaching a turning point. Extreme sentiment is a particular concern given surveys like the DSI (Daily Sentiment Index) show just 17% bulls in the currency amongst short-term futures traders. Historically, whenever the Aussie has neared such levels of negative sentiment it has been a good contrarian and leading indicator of a turn.
Of course sentiment alone is not good enough reason to enter a counter-trend trade, especially in a trend as pronounced as in AUD/USD at the moment. However, given the fact that time cycles suggest a turn of some sort will be seen next week combined with the fact that the exchange rate is nearing critical price levels like the .9570 50% retracement of the 2010 to 2011 advance and we seem to have all the variables necessary for a correction. As such, we like the risk to reward of positioning on the long side over the next few days.
Looking for other ways to pinpoint sentiment extremes in the Australian Dollar in real time? Try the Speculative Sentiment Index.
AUD/USD Daily Chart: May 30, 2013
Charts Created using Marketscope – Prepared by Kristian Kerr
Event Risk Over Coming Sessions:
Source: DailyFX Calendar
LEVELS TO WATCH
Resistance: .9700 (88.6% retracement of June to September advance), .9790 (Gann level)
Support: .9570 (50% retracement of the 2010 to 2011 advance), .9535 (year-to-date-low)
STRATEGY – Buy AUD/USD
Stop: Close below .9535
Target 1: .9700
Target 2: .9790
--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.