This past Monday I commented on how I was looking to sell the AUDUSD below 0.7608. At the time the pair was trading at 0.7618 following the bearish engulfing pattern from March 21st.
I received a few emails in support of this idea. However, the majority of those who responded were against selling the AUDUSD. And as I look around, that appears to be the overwhelming theory – that the Aussie is likely to move higher against the U.S. dollar.
That may be true. I don’t presume to know the future nor do I need to know it to be successful. The only thing that matters when confirming a setup is what the market has done, not what it might do.
At the moment, the AUDUSD continues to coil above the confluence of support at 0.7608. So as for what the pair has done, the answer is not much, at least not yet.
However, if sellers do manage a break of support over the coming sessions, it could establish one of the more lucrative opportunities for the month of April. The next key support below 0.7608 doesn’t come in until 0.7500, a level that has dictated price action since March of 2016.
A close below 0.7500 would expose 0.7330. This level is the 50% retracement of last year’s range and has been a key factor since 2015.
So why am I favoring a downside break rather than a bullish scenario?
There are a couple of reasons why. The first has to do with the major trend that has been in place since July of 2011.
As you can see from the weekly chart above, the AUDUSD is carving out a wedge pattern following a 2,600 pip drop.
These formations tend to signal a continuation of the current (major) trend. Had this wedge formed at a downward angle, it would represent exhaustion and perhaps a bullish reversal.
But as it is, the wedge has formed on a plane, which suggests healthy consolidation following the eighteen-month decline.
The second reason I’m favoring a move lower has to do with recent price action. The early March selloff was met with a frenzy of buying pressure just above the 0.7500 handle. Most of those gains were the result of a more dovish than expected Fed on March 15th.
Now, although the pair managed to carve out a higher high on March 20th (albeit by just 7 pips), buyers were unable to maintain levels above 0.7700. They also failed to break wedge resistance near 0.7730.
Fast forward to this week’s bounce from 0.7500, and we can see that buyers are once again beginning to struggle. While it’s certainly not a sign of imminent weakness, the way the pair has rolled over in the last 24 hours doesn’t offer much confidence if you’re a bull.
In summary, the AUDUSD looks exhausted at current levels. And if we do get a daily close below the confluence of support at 0.7608, I won’t hesitate to pull the trigger on a short entry. But without a close below it, I’ll remain on the sideline and wait for the market to show its hand.
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