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Bearish AUDJPY as Topping Pattern Matures, Awaiting Key Support Break

Bearish AUDJPY as Topping Pattern Matures, Awaiting Key Support Break

2015-11-24 13:30:00
Tyler Yell, CMT, Currency Strategist
Share:

Point to Establish Short Exposure: Close Below 87.30

Spot: 88.25

Target 1: 86.05 Weekly S2

Target 2: 82.81 September 29th Low

Invalidation Level: Close above 89.00 (November High)

Fundamental & Technical Focus:

Right now, the Australian Dollar is the strongest currency in the G10. Selling the strongest currency or buying the weakest currency isn’t encouraged at the market. However, as many traders know, these currencies can be very attractive for a multiple percentage move in a reversion to the mean/ average. If the Australian Dollar is in fact, going to revert to channel support or the mean, then we can look for triggers that show us the move may be happening as well as attractive currencies to buy against a mean reverting currency. The fundamental cause for a potential AUD top turning into another downtrend is uncertain at best. Last, RBA Governor Stevens did not signal that attempts to weaken the currency were imminent however further stretch in the Australian Dollar while the Australian economy is handling the constant decline in commodities, like the highly important Iron Ore or Copper that continue to push multi-year lows, might be cause for verbal intervention.

The current market sentiment of AUD long or JPY short may not hold for long, and if not, AUDJPY could drop rather aggressively. Australia is acutely sensitive to China. Recently, the data from China has been disappointing, and that has caused many to foresee another Yuan devaluation. August was so far; the most turbulent month in markets this year, and the kick-off for the risk-off move was the Yuan devaluation by the Peoples Bank of China.

While fully possible that the Federal Reserve pulls another move akin

Chart:

Bearish AUDJPY as Topping Pattern Matures, Awaiting Key Support Break

Technically, a few points stand out to me, least of which is that price pattern coming off the August 24th low. Additionally, an Andrews Pitchfork price channel (red) shows resistance internally and median line resistance on the higher-corrective pitchfork (blue). Should the pattern hold, a breakdown toward new yearly lows is likely. The current YTD low is 0.6891, and that is also the current Weekly S2 Pivot.

In addition to Andrew’s Pitchfork resistance, there is a multitude price and pivot support points around 87.30. A break below 87.30 on a daily close basis would show with credibility that the ~40% retracement of the 2015 range over the last 3-months could be finished that could resolve itself to the downside.

An important note is that this pair could easily move marginally higher to new 3-month highs before reverting. A short-term upside target before a presumed reversal lower is near the weekly R1 ~89.60. 89.60 is also the 50% Fibonacci retracement of the May / August range, which could be an attractive spot for a top, and that is another reason I’m not entering short at the market.

AUDJPY Resistance & Support Levels

2nd resistance: 89.59 Weekly R1 Pivot Level

1st resistance: 89.00 November Range High

Spot: 88.35

1st support: 87.40 Weekly S1 Pivot Level

2nd support: 85.41 November Low

Trade Setup:

I am looking to sell AUDJPY on confirmation that price is breaking below key support. A daily close below 87.30, the Weekly S1 support level would help validate either AUD weakness or JPY strength could create a spillover effect that results in a sharp drop. Upon this development, a stop above the November high of 89.00, with a potential stop and reverse order in the case the signal is a false trigger, would be in order. The target is at 82.81, which is the September 29th low. This target aligns with a favorable risk: reward ratio that our Traits of Successful Traders report found to be one of the best things a trader can do to ensure long-term sustainability in your trading.

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