The only thing worse for longs than a rising wedge is an upward sloping flag. Don’t get me wrong. Ascending and descending channels form all the time in trending markets. It’s when they occur after an extended move up or down and in the direction of the prevailing trend that you need to be extra careful when setting expectations.
AUDUSD certainly fits that description as the pair has now gained 900 pips since the January low at 0.6830. What’s more is that we haven’t seen much in the way of a pullback to support since the Australian dollar began its ascent nearly three months ago.
But it isn’t just the upward tilt to the 4-hour channel (second chart below) or lack of a meaningful pullback that would have me concerned as a potential buyer. A look at the daily chart shows a level at 0.7800 that is no stranger to influencing price.
The 0.7800 handle was a major contributor to the rise and fall of the pair between February and June of last year. Combine this with the tight upward sloping range that has been in place since mid-March and we could have turbulence ahead.
Of course, this does not mean that the flag pattern you see below is strictly a bearish signal. Formations such as this do occasionally break higher. But I would be remiss if I didn’t point out that they fail more often than not, at least in my experience.
In summary, the 0.7800 handle could offer an opportunity to get short with the right bearish price action. A realistic target from there would be channel support, somewhere near 0.7580. Alternatively, a close above the confluence of resistance at 0.7800 could offer a favorable opportunity to get long, which would target the May 2015 high at 0.8160.
Note: China reports first-quarter real GDP at 10 pm EST, which will likely shake things up for the Australian dollar.