Aussie heads towards decline as AUD/USD dips below support level

AFTER hitting a bottom of 0.55 on Mar 19, 2020, commodity pair AUD/USD had a stellar performance for 11 months before topping out at 0.80 in late February this year. The pair had fallen in a downtrend since then and formed a death cross on the weekly chart where the shorter-term 50 period moving average crossed below the long-term 200 period moving average trend line.

At the time of analysis on Dec 2 2021, the AUD/USD penetrated below a key support level at 0.7143. This article will elaborate on a few observations that point to further decline for the Aussie.

Firstly, the completion of a large head and shoulders pattern stretching from July 2020 signalled a continuation to the downside. The head and shoulders pattern can be identified after an uptrend with 3 peaks supported by a common neckline support: first and third peaks almost equal in height while the second peak being the tallest. This bearish reversal pattern signals a waning buying power. Moreover, at the top of the "head", AUD/USD also made a double top pattern - another tell-tale sign that prices have peaked and are bound for a reversal.

The confluence between the 2 chart patterns builds a convincing case of a bearish AUD/USD.

Next, the pair had also broken out of a 3-month-long rising wedge for which price is on track to meet its technical downside target. The rising wedge formation which spanned from August to October this year was spotted by connecting the higher highs and higher lows in price. The upper resistance and lower support form a converging wedge which is a trend reversal pattern. Upon the breakout below the lower support line, a technical target as deep as the height of the rising wedge opening can be anticipated.

Thirdly, technical indicators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) validate that the trend favours the bear. RSI is a momentum indicator that signals overbought conditions when its above 70, and oversold when below 30.

After a dead cat bounce in the second half of October which saw the RSI rise above 54, the reading was rejected back into the bearish zone in November and has since trended lower.

On a downtrend, RSI tends to stay below the neutrality area at 50. The 50 RSI line also serves as the overbought region when prices are in a bearish trend. On the other hand, the MACD also indicates that the bearish momentum is in full swing with the histogram in the negative region and below the signal line.

In the near term, we hold the view that AUD/USD will test the first support line at 0.7 (S1), which is the breakout target for the rising wedge. At the same time, a rebound to retest the head and shoulders neckline support turned resistance can also be expected. In the event of a successful retest and resultant price decline, the bearish outlook for the pair will be cemented and traders could aim to achieve the head and shoulders downside target at 0.6335.

In an alternate scenario of a failed neckline re-test, R1 (0.724) would serve as a resistance.

• The writer is a strategist at Phillip Futures

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.

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