Originally published by guppytraders.com
Tuesday January 1 the Australian dollar crashed to 0.6745 before closing at 0.6915. Thursday January 3 the Australian dollar crashed again to 0.67.41 before closing at 0.7004. It’s the second crash that gained the most attention and it was dismissed as a flash crash, driven by algo trading rather than market fundamentals. January 1 was a holiday, so the earlier crash was conveniently ignored.
It’s true that these two crashes to 0.676 had some of the characteristics of a flash crash, but to dismiss both of these are an aberration is to ignore the charts, which provide a more bearish outlook. These rapid price dips appear in many markets, and often they are a precursor to future lows. In equity markets these are spike lows where informed traders are getting out before news hits the market. The same principle can be applied in FX markets. To suggest that these were the result of low liquidity in the most liquid market in the world may provide comfort, but it does not provide certainty.
The weekly chart of AUD/USD shows the Aussie trapped in a strong downtrend. The downtrend is well defined with the Guppy Multiple Moving Average (GMMA) indicator. The long term GMMA is well separated. This suggests that the long-term secular trend is down, and that it is well entrenched. The width and consistency of the separation shows continued selling.
The rally to near 0.74 in December was quickly overwhelmed by selling. The rally did not create any compression activity in the long GMMA, and this confirms bearish trend strength. The Aussie retreated to a potential double bottom near 0.70, and if we conveniently ignore the spike lows, the current rally has some of the characteristics of a double bottom rebound.
But in the market, we cannot conveniently ignore aspects of price action that we do not like. The weekly chart shows a single spike to 0.6745 but the daily chart shows two spike lows.
The GMMA shows a consistent, strong downtrend. The fall to 0.6745 may include some overshoot but it is a prelude to continued Australian dollar weakness. Traders watch for as retest of the previous 2016 lows near 0.69. This is a good market for shorting and the flash crash provides an early indication of the target areas. As the old-time gold miners knew, a flash (of gold) in the pan was a precursor to profitable mining.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.