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AUD/NZD Divergence Signals Short-term Trend Reversal

AUD/NZD Divergence Signals Short-term Trend Reversal

2011-08-03 20:41:00
Michael Boutros, Strategist
Share:
AUDNZD_Divergence_Signals_Short-term_Trend_Reversal_body_Picture_2.png, AUD/NZD Divergence Signals Short-term Trend Reversal

The AUD/NZD pair has maintained a well defined descending channel formation since late April as kiwi strength saw the pair continue to move to the downside. With strong support seen at the 1.24-handle and RSI dipping below the 30 level, the pair is likely to rebound for a possible test of upper-bound trendline resistance. Daily RSI is also currently signaling bullish divergence as price action makes lower lows and the RSI signal line makes higher lows. Although a pickup in risk appetite will tend to benefit both the Aussie and the kiwi, interest rate differentials will continue to favor the Aussie. Accordingly, our bias on this scalp will be weighted to the topside despite the encompassing bearish trend.

AUDNZD_Divergence_Signals_Short-term_Trend_Reversal_body_Picture_3.png, AUD/NZD Divergence Signals Short-term Trend Reversal

Bullish divergence is also seen on a 30min chart with the RSI slope sharply angled to the topside. Note that the convergence of short-term trendline resistance and the 1.2460 resistance level should see an accelerated topside moves with a breach. Preferred long entry targets are held at the 50% Fibonacci extension taken from the July 12th and 27th crests at 1.2430, and 1.2395. Resistance profit targets are eyed at 1.2460 backed by the 38.2% Fib extension at 1.2490, 1.2525, and just below the 23.6% extension at 1.2560.

With a 2-hour average true range of just 42.96, profit targets on said scalp should be between 28-33pips depending on entry. Note that the scalp will not be active until a rebound off of support target 1 at 1.2430 or a confirmed break above 1.2460. Once the scalp is active the levels will remain in play until such time when either of the topside/bottom limit targets are compromised.

Key Thresholds

A daily RSI read of 29.88 suggests risk to the pair remains to the topside. We reckon a break below the convergence of the 61.8% Fibonacci extension and trendline support dating back to July 19th at 1.2370 negates the bullish bias on the trade with such a scenario eyeing the bottom limit break-targets at 1.2340 and the 76.4% extension at 1.2295. Likewise a break above the topside limit at the convergence of upper-bound trendline resistance at the 23.6% Fibonacci extension at1.2560 risks further losses for the kiwi with topside break-targets eyed at 1.2615 and 1.2680.

Entry/Exit Targets

Timeframe

Level

Resistance 1 Target

30min

1.2460

Resistance 2 Target

30min

1.2490

Resistance 3 Target

30min

1.2525

Topside Limit

30min

1.2560

Topside Limit Break-Target

30min

1.2615

Support 1 Target

30min

1.2430

Support 2 Target

30min

1.2395

Bottom Limit

30min

1.2370

Bottom Limit Break-Target

30min

1.2340

Reference Values

Indicator

Timeframe

Level

Fibonacci Extension – 0%

1hour

1.2688

Fibonacci Extension – 23.6%

1hour

1.2566

Fibonacci Extension – 38.2%

1hour

1.2490

Fibonacci Extension – 50%

1hour

1.2430

Fibonacci Extension – 61.8%

1hour

1.2369

Fibonacci Extension – 76.4%

1hour

1.2294

Fibonacci Extension – 100%

1hour

1.2173

10-SMA

Daily

1.2537

20-SMA

Daily

1.2635

50-SMA

Daily

1.2860

100-SMA

Daily

1.3167

RSI

Daily

29.88

Average True Range (14)

2hour

42.96

Related Economic Data Releases

Notwithstanding significant swings in markets sentiment, event risk for the trade rests primarily rests with the kiwi with employment figures on tap overnight. Year on year employment is expected to rise by 2.0%, up from a previous read of 1.8% y/y, with the unemployment rate expected to ease to 6.5% from 6.6%. A stronger-than-expected print on the data risks upsetting our bias as kiwi strength will weigh on the AUD/NZD pair.

Upcoming Events

Country

Date

GMT

Importance

Release

Expected

Prior

NZ

8/3

22:45

MEDIUM

Employment Change (QoQ) (2Q)

0.0%

1.4%

NZ

8/3

22:45

MEDIUM

Employment Change (YoY) (2Q)

2.0%

1.8%

NZ

8/3

22:45

MEDIUM

Unemployment Rate (2Q)

6.5%

6.6%

NZ

8/3

22:45

LOW

Participation Rate (QoQ) (2Q)

68.4%

68.7%

Written by Michael Boutros, Currency Analyst for DailyFX.com

To contact the author of this report or subscribe to their daily analysis, please send inquiries to:mboutros@dailyfx.com

You can also follow Michael on Twitter@MBForexfor updates on this scalp and other trades.

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