AUD/USD Technical Analysis: Bounce May Precede Deeper Losses

2018-08-14 01:00:00 Ilya Spivak, Head Strategist, APAC

AUD/USD Technical Strategy: NET SHORT AT 0.7547

Australian Dollar range break hints downtrend to resume
RSI divergence warns bounce may precede next down leg
Waiting for upswing or re-acceleration to scale up short

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The Australian Dollar looks set to resume the downtrend against its US counterpart after breaking through the floor of a two-month congestion range. From here, a daily close below the 0.7145-69 area (double bottom, 38.2% Fibonacci expansion) opens the door for a test of the 50% level at 0.7071. Alternatively, a turn back above the chart inflection point at 0.7335 paves the way for a challenge of down trend resistance in the 0.7364-0.7461 congestion zone.

Shorter-term positioning hints that follow-through may not be immediate, with a corrective upswing preceding bearish trend continuation. The four-hour chart reveals signs of positive RSI divergence, which hints that downside momentum is ebbing. This can serve as lead-in for recovery, at least in the near term. That need not necessarily occur – divergence can just as well mark a period of sideways consolidation before trend resumption – but its appearance is a noteworthy warning sign of would-be sellers.

With that in mind, it seems premature to add further to the AUD/USD short position triggered at 0.7608 and subsequently scaled up near 0.7530. Price action will be monitored closely and if the bounce indeed materializes, signs of topping in that move will be sought to increase exposure. If the down move appears to be regaining traction without a prior recovery, this too may serve as a potential trigger to add to the trade (provided risk/reward considerations are acceptable).