Medium-term Trading Idea FX AUD/USD – Sideways With Upwards Shoot: Likely Triangle Formation

Trading opportunities for currency pair: going against a bear trend. Wave “B” on the weekly is forming as a triangle. It could trade between 0.7100 and 0.7370 until the end of the year. As soon as wave B forms wave “e”, look to open long positions with small protective stops under 0.7016 and with a 0.7620 target. A closing of the daily candle below 0.7016 will cancel the triangle and any growth scenario.

Background

The last idea I made on the Aussie came out on 23rd November. When it was published, the Australian stood at 0.7236 against the Yankee. In the idea I recommended taking a wait and see stance for two days so as to check whether there really would be a break in the trend line which the bulls had broken on 20th November.

On that Monday (23rd November) the AUD/USD dropped to 0.7158, but over the next six days it couldn’t manage to close below 0.7190. For me this was a controlling price level for checking the existence of a break. The break was confirmed. On 30th November a new bullish impulse was borne which hit 0.7384. With a close of the daily candle above 0.7296, any fall became invalid.

When there was a shift upwards, the buyers met a strong resistance which had formed from the 0.7439 (11th August) and 0.7381 (12th October) maximums. The AUD/USD didn’t make it to the targeted 0.7420/36 region (the zone from the previous review). Due to a fall in oil and iron ore prices, the price returned to 0.7096.

Current Situation

I didn’t just choose this currency pair for no reason. Take a look at the daily graph. The AUD/USD has renewed from a 0.7096 minimum to 0.7272 after a price stabilisation of oil and iron ore prices.

Futures for ore with a 62% iron content closed at $39.08 on Thursday. The price has been at that level since 10th December, 2015. Oil has jumped from a $35.98 per barrel minimum due to a significant fall in US oil reserves. Brent costs $37.89. The financial markets were closed on Friday due to it being Christmas.

As soon as iron ore stops falling in price, the Aussie will try to strengthen against the Yankee. We can see clearly a triangle on the daily. The only thing is that when it formed, I found a fault in it. If I remember correctly, a “b” wave which is smaller than that of “A” should not touch the lower line of the triangle (shown as a cross on the graph). As such, we cannot say the start of the first wave is from 0.6907.

Using the rules of wave analysis to take away that extra noise, we need to shift up to the weekly time frame. I put part of the weekly inside the daily graph. You can see that things are much clearer in it than on the daily. I have marked out the “A-B-C” correctional formation. The "A" wave has formed like a three-waver. We could say that the “B” wave is something of a triangle (marked on the daily). I’ve shown a continuation of the price movement with a forecasted line on the daily and weekly graphs.

At the end of last week we saw a two-day rally of prices on commodity markets which facilitated a strengthening of the Australian dollar. A lack of important news this week is also playing into the buyers’ hands. Monday is a day off for former Commonwealth countries: Australia, New Zealand, the UK and Canada. Since the market is low on liquidity on the run up to New Year, it’s quite likely that the AUD/USD will reach the upper limit of the triangle at 0.7370. The limit of the range ‘til the year’s end is 0.7170 – 0.7400.

As you know, the Chinese economy is weak and any chance of revival of oil and iron ore prices is fragile. A close of the daily candle below 0.7016 will cancel the triangle and the growth scenario to 0.7620.

A figure which indicates a weakening of the USD has formed on the Australian. This means that the risk of seeing growth on other key pairs is up. In this situation, it’s necessary to keep an eye on EUR/USD, GBP/USD and NZD/USD all at once.