The Australian Dollar is trading lower this morning, following Monday’s closing price reversal top and Tuesday’s confirmation. Investor appetite for riskier assets continues to soften, setting up the possibility of a downtrending day. The primary concern amongst investors is the pace of global economic growth.
Traders are beginning to worry that global economic growth has peaked, setting the stage for a possible near-term drop in demand for precious metals and other commodities. Commodity-linked currencies such as the Australian Dollar (Aussie), the New Zealand Dollar (Kiwi) and the Canadian Dollar (Loonie) are likely to feel the brunt of the selling pressure. Because of the massive expansion to the upside in all of these currencies, they remain the most vulnerable to sizeable corrections.
High inflation and rising interest rates are most likely the main cause of concern for commodity prices. With a shift in demand for commodities seemingly beginning, conditions are ripe for the start of a huge rally in the Dollar.
Technically, the Australian Dollar formed a daily closing price reversal top on Monday. This move typically lasts 2 to 3 days or 50% of the last rally before turning back in the direction of the main trend.
Today is day two of the correction. It’s still a correction since nothing took place to change the trend to down. A topping formation may take 5 days to form since the current chart pattern may evolve into an “M” top pattern. If this occurs then a bottom or change in trend level will emerge, making it easier for bearish traders to identify the level at which the trend will change to down. Also, following the formation of a swing bottom, long traders will have a logical point to move their trailing stops.
Based on the current main range of .9704 to 1.1011, look for a possible near-term correction to 1.0357 to 1.0203. Uptrending Gann angle support is at 1.0384 today, making 1.0384 to 1.0357 an important support cluster. All of these areas are unlikely to get tested today since they are well out of the normal daily range of the currency.
Downtrending Gann angle resistance is at 1.0931, 1.0971 and 1.0991.
The daily closing price reversal top can be read two ways. One, it can be used as an exit strategy for those long traders who want a quick logical exit rather than wait for a swing bottom to move up on the charts. Two, aggressive bears can use it to enter new short positions.
Although the Australian Dollar has formed and confirmed a closing price reversal on the daily chart, the trend remains up. Therefore, bearish traders may have to wait another 2 to 3 days to see if an “M” top will form to set up a possible change in trend. Traders should also watch Friday’s close to see if the market will form a weekly closing price reversal top. Should this occur, then it is possible that a major top is being formed. This will occur following a close under 1.0965.
