AUDUSD has carved out yet another bearish pattern near channel resistance that extends from the April 2013 high. The first occurred on September 8th and triggered an impressive 200 pip selloff over the next three sessions.
While yesterday’s session didn’t form the same pin bar style candle, it did completely engulf Wednesday’s range. On top of that, the pair closed the day back below the 0.7650 handle, an area that has been on our radar for weeks.
Over the weekend I mentioned that my bias remains weighted to the downside, and with yesterday’s close that bias has only strengthened. So far in fact that I believe this recent rally may be the last before a major push lower.
It’s merely speculative at this point, but a close below ascending channel support could trigger a larger decline that would pressure the current 2016 low at 0.6826. That may seem far-fetched, but channel breaks often target their starting point, which in this case is a level that is currently 800 pips away.
But first, we need to see follow through on yesterday’s bearish formation. In the near-term, I’m going to look for the 0.7650 level to hold as new resistance on a daily closing basis. Key support comes in at 0.7565 along with ascending channel support near 0.7480.
For those interested in finding out why I believe a risk-sensitive currency like the Australian dollar could be in for a larger decline, feel free to continue reading.
You may well know that the Aussie dollar is sensitive to both risk-on and risk-off environments. When risk assets strengthen the Aussie tends to strengthen and when they weaken the AUD struggles. This isn’t always the case, but the correlation is certainly alive and well, especially when risk aversion intensifies.
A standard benchmark for risk appetite (the level of acceptable risk by any one person or organization) are the equity markets. Just look at how the AUDUSD stacked up to something like the Dow Jones Industrial Average in 2008.
Here’s a weekly chart of the Dow during the 2008 era.
And now for the AUDUSD…
That’s a 3,800 pip drop that took a little more than a year to play out.
Now I’m not saying that we’re on the verge of another crisis nor am I implying that the AUDUSD will perform in the exact same manner when we hit another rough patch. I use “when” and not “if” because it’s only a matter of time.
But again, these correlations do exist and have appeared twice in September alone – once on September 9th and again during yesterday’s session.
Stay with me because this next part is important.
If you have followed me for a while now, you know that I’m not one to call tops or bottoms. I don’t make bombastic predictions, and I certainly don’t take unnecessary risks.
However, I have good reason to believe that the equity markets have topped out. And if they haven’t yet, they’re extremely close. I could also be completely wrong, but I’ll work under this notion until the markets prove me wrong.
More specifically, the highs we saw in both the S&P 500 and Dow Jones in August could be the last for a very long time. If this is true, any risk sensitive pair such as the AUDUSD or even the NZDUSD is going to struggle to make gains in the near-term.
Of course, no market moves in a straight line especially when accompanied by an increase in volatility. Keep this in mind as you plan new trade ideas and manage exposure.
If you’re wondering how I came to this conclusion, it’s all about Fibonacci levels. For the Dow Jones specifically, it was a simple Fibonacci analysis spanning more than 100 years that makes me doubt the longevity of the broader risk-on environment from current levels.
It’s also the same method I used to explain the GBPJPY top last September as well as NZDJPY in February of 2015, although I only mentioned the latter in the member’s community. Feel free to email me if you’d like more information on the NZDJPY analysis from last year.
By the way, those two are down 5,400 and 1,700 pips respectively since I covered them in 2015.
But just to be clear, I am in no way implying that risk assets as a whole are about to come crashing down. What I am saying is that I won’t be buying stocks anytime soon. How you incorporate that statement into your Forex game plan is up to you.
Perhaps I will write more about what I see in the equity markets and how it correlates to currencies in the coming days. For now, what’s important is how the AUDUSD reacts to the 0.7650 handle going forward.
Want to see how we are trading this setup? Click here to get lifetime access.