AUD/USD – Will the Real Trend Please Stand Up?
- AUD/USD testing key resistance confluence
- Bullish sentiment nearing contrarian extremes
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AUD/USD has finally reached the key resistance zone I have been eyeing over the past couple of weeks between .7800 and .7870. As a reminder the .7800/70 area is important as it marks a fairly tight confluence of 12 square root relationships from the YTD low, the 200% projection of the January – February range, an internal trendline connecting the August 2013 and January 2014 lows, the 38% retracement of the 2014 – 2015 decline and the 78.6% retracement of the May to January move lower. In terms of time, it is a little past the ideal window for a reversal (that would have been last week), but timing relationships aren’t really as finite as price so I try to give them a little wider birth (+/- a few days on either side).
Now it is easy to forget that the long-term trend in AUD/USD is still down given the persistent rise in the exchange rate since late January, but the clear risk heading into this resistance zone is that the broader trend tries to reassert itself. Other things I monitor like sentiment and momentum also suggest the rate is vulnerable to a turn lower. Sentiment, as measured by the Daily Sentiment Index, is very close to contrarian extremes (87% bulls) and warns the market is leaning too heavily in the same direction. This condition is often present before a turn. There is also a pretty clear developing divergence in momentum as the 3-week rate-of-change is well below the highs recorded last month. Oscillator divergence isn’t my favorite technical tool, but when it occurs into long-term resistance it is usually worth paying attention to. Weakness under .7745 would help confirm that a top of some kind is in place, while continued strength through .7900 would signal that the medium-term uptrend might be only getting started.
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--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.