The Australian dollar has been a tough market to read this month.
That’s been true for several currency pairs and even stocks.
However, I think that’s about to change.
While pairs like AUDUSD are still sideways this month, the chart suggests a potential breakdown in the days ahead.
And the S&P 500 is painting a similar picture.
I mentioned it yesterday on Twitter, but the S&P 500 (SPX500) is starting to look tired.
The upper level extends from the October closing prices at 3,580 and was tested as resistance during last week’s FOMC.
Last Wednesday’s candle was also a bearish engulfing pattern.
The lower trend line is much less significant and extends from the March low.
Additionally, the volume has slowly declined during this ascending consolidation, another sign of bullish fatigue.
A break of support this week would open up targets like the December and January lows at 3,785.
So what does this have to do with the AUDUSD?
Given its strong positive correlation to equity markets, the Australian dollar is considered one of the “riskiest” currencies.
In many ways, the AUDUSD is a risk asset similar to stocks.
Notice how AUDUSD has tracked the movement of the S&P 500 for years.
It isn’t a perfect correlation, but none are.
Armed with this information, we can deduce that a breakdown from the SPX pattern above would trigger a similar break from AUDUSD.
And when we combine it with the AUDUSD 4-hour channel below, we have what could be an “A+” setup on our hands.
But first, we need to see the S&P 500 and the Australian dollar break down.
That means seeing the SPX close a day below 3,960, and AUDUSD close a 4-hour candle (minimum) below channel support near 0.6650.
But keep in mind that 0.6580 and 0.6525 are key supports for the pair.
Resistance for AUDUSD comes in at 0.6720.
