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ASX 200 Volume Divergence Weighs on Australian Dollar Outlook

ASX 200 Volume Divergence Weighs on Australian Dollar Outlook

Daniel Dubrovsky, Strategist

ASX 200, Australian Dollar, Volume Divergence, Coronavirus - Talking Points

  • ASX 200 and Australian Dollar have been rallying on virus easing bets
  • Negative volume divergence warns underlying weakness in the former
  • Continuation patterns are brewing in the ASX and Australian Dollar

ASX 200 and Australian Dollar Gain as Technical Signal Shows Warning Sign

Since late March, the ASX 200 and the sentiment-linked Australian Dollar have enjoyed the cautious improvement in market mood. The former climbed over 17 percent while AUD/USD gained over 6.5%. This has followed a combination of aggressive global fiscal and monetary stimulus. More recently, coronavirus case stabilization from parts of the United States and Europe seemed to have added momentum to equities.

Yet trouble may be brewing ahead locally based on acute technical signals. Since the bounce in Australia’s benchmark stock index, volume has been notably on the decline – see chart below. The latter measures the total amount of shares traded for a given asset. In a healthy market, volume tends to rise alongside prices which is a sign of conviction behind trends.

Negative volume divergence on the other hand is a sign of underlying weakness and can at times precede a turn lower. These are volatile times in financial markets which arguably increases the importance of confirming key chart breakouts and aggressive moves. With that in mind, a turn lower in the ASX 200 could spell broad weakness for the Australian Dollar. AUD/USD and the ASX tend to move in tandem.

From a fundamental perspective, some volatility in local assets may be in store with the RBA rate decision on tap later today. Odds of a further 25-bp rate cut are near-even. I will be covering the announcement starting at 4:15 GMT– see link below. Down the road, the markets will continue weighing prospects of coronavirus stabilization against the anticipated souring in dismal economic data ahead.

ASX 200 Negative Volume Divergence

ASX 200 Volume Divergence Weighs on Australian Dollar Outlook

ASX 200 Technical Outlook

The ASX 200 seems to be forming an Ascending Triangle on the 4-hour chart. This is a continuation pattern where follow-through tends to be determined by the direction of the breakout. A push above 5410 with a confirmatory close above 5538 exposes the midpoint of the Fibonacci retracement at 5799. Otherwise a close under rising support from late March may pave the way for a retest of current 2020 lows.

ASX 200 4-Hour Chart

ASX 200 Volume Divergence Weighs on Australian Dollar Outlook

Chart Created in TradingView

Australian Dollar Technical Outlook

My majors-based Australian Dollar index – averaging it versus USD, EUR, GBP and JPY – also seems to be within the confines of an Ascending Triangle. A push above 0.7431 on the chart below with confirmation may extend the bounce off March lows. On the other hand, a drop through rising support from last month may open the door to a general depreciation in the Australian Dollar as it weakens towards lows from the past two weeks.

Majors-Based Australian Dollar Index (4-Hour Chart)

ASX 200 Volume Divergence Weighs on Australian Dollar Outlook

AUD Index Created in TradingView

--- Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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