Originally published by Guppytraders.com
The Australian dollar has developed a strong breakout above the upper edge of a long term trading band. This breakout at a time when the Australian market is one of the weakest performing markets globally. It lags the US, UK, German, Singapore, Taiwan, Malaysian and Korean markets by substantial amounts. Its not economic strength that is driving this breakout.
The Aussie strength is a direct consequence of weakness in the US dollar which in itself reflects the deep disillusionment with Trumps policies and endless tweets that defy reality.
The trading band is the most significant feature on the Australian dollar chart. The upper edge of the trading band near US$0.775 was established in 2016 April. The lower edge of the trading band near US$0.715 was first tested in 2016 June. The trend behaviour since 2016 June has been weak with the Australian dollar essentially moving sideways.
In 2016 November the Australian dollar retreated strongly from resistance near US$0.775 and by 2016 December was testing the support level near US$0.715. The rebound rally from this level confirmed the strength of the trading band.
The sharp fall from US$0.775 to US$0.715 and the sharp rallies from $0.715 to $0.775 offered good trading opportunities but they do not indicate strong trend changes. The breakout above US$0.775 is significant because it’s the first strong move in 18 months. A breakout above this level can move rapidly to the next resistance feature.
In the longer term the width of the trading band can be projected upwards to set a target near US$0.835. This target is treated with caution and used as a guide only.
We use Guppy Multiple Moving Averages (GMMA) indicator analysis to identify trend strength and trend changes. In these situations it is a powerful analysis tool. The GMMA is not the best indicator to apply to understand a sideways market. The current breakout has triggered a change in the GMMA but its too early to know if this breakout is sustainable based on GMMA analysis. Trend confirmation comes when the short term GMMA moves above the upper edge of the trading band. This will be the key leading indicator.
This non-trending environment shows no signals of trend change and GMMA analysis is not a useful strategic analysis tool. However trend line and trade band analysis allows the trader to identify the significant trend break points and establish targets.
Despite the rally breakout this is not yet a trending market so traders apply short term trading methods to capture the rally and retreat behavior. We use the ANTSSYS trade and analysis method to identify the opportunities as the rally develops. The behaviour of the Australian dollar rests upon President Trump behaviour so the leading signals come from the US Dollar behaviour.
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.