Signs point to fading bullish momentum for AUDUSD

AFTER a golden cross that confirmed an uptrend for AUDUSD, there are now signs that the bullish momentum is fading for the pair. In the medium term, we hold the view that AUDUSD may stage a trend reversal to the downside. However, in the immediate short term, signs are showing that the pair will have a small rebound or consolidation around its current range, before resuming its broader downtrend.

First and foremost, a tell-tale sign that indicates a trend reversal is around the corner would be the formation of a bearish head and shoulders pattern. This pattern appears as a baseline with three peaks, with the left and right peaks close in height, and the middle "head" being the highest. A head-and-shoulders pattern that occurs after a long uptrend is believed to be one of the most reliable trend reversal indicators.

Secondly, the Relative Strength Index (RSI) is also painting a bearish picture for the pair. RSI is a momentum indicator that signals overbought conditions when its above 70, and oversold when below 30. Since retreating from the third peak of the head-and-shoulders pattern, the RSI has been struggling to break beyond the neutrality area of 50. On a downtrend, drawing a line at 50 will be helpful in flashing overbought signals. Since June this year, the RSI has pulled back several times before even reaching 50, which indicates a strong downward momentum.