The AUDUSD seems to be getting its cues from GBPUSD. Last Friday, the Australian dollar closed below a confluence of support at 0.7160. I mentioned this breakdown over the weekend.
However, I gave a warning about Friday’s move. Here’s what I wrote on Sunday:
Just know that Friday’s breakdown could be a bear trap, so reducing your position size may not be a bad idea. And if the AUDUSD closes the day (using a New York close chart) back above 0.7160, it would negate the bearish outlook for the time being.
If you’ve followed me for a few weeks, this may feel familiar. The GBPUSD did the same thing in mid-August. The pair broke below descending channel support but then closed back above it on the 20th.
It took the pound a few weeks, but that mid-August false break eventually led to this past Monday’s close above channel resistance followed by this week’s rally.
What’s the connection here?
Both markets broke below a descending pattern. GBPUSD closed below descending channel support, and AUDUSD closed below falling wedge support.
Whenever you see a downside break of a descending pattern or an upside break of an ascending pattern, it’s usually best to stand aside. These are often referred to as bear and bull traps respectively.
Fast forward to today, and we can see that the AUDUSD is trading back above the 0.7160 area; though buyers are once again beginning to struggle.
For now, that 0.7160 area will likely attract buyers if tested. Just know that any buying here would be counter-trend, so you may want to reduce your position size or sit this one out altogether.
As for resistance, the 0.7235 level is the one to watch. I mentioned 0.7235 last Thursday, and yesterday’s high was 0.7229. That’s no coincidence.
Conviction has been a rare commodity lately across the entire currency market. We’ve seen many breakouts and even false breaks, but follow-through has been lacking, at least relatively speaking. We’ll see if that changes next week.