After taking beating in the latter half of 2014, I think the risk/reward in AUD/USD may be shifting from the short side to a more netural/long bias.
First, lets take a look at a weekly chart to get an idea of where this pair is on a structural basis.
There are a few things that I think are important about this chart.
1. Prices are 19% below the 200 week simple moving average.
2. Prices have met their price target at the 161.8% extension of the January – July ’14 rally.
3. Prices are back at the 2010 lows which was key support / resistance in the past.
Next, lets take a look at the daily chart to see if it confirms what we’re seeing on the higher timeframe.
1. Prices have put in a false breakdown below both the 2010 lows and prior pivot low at .8087.
2. Momentum has confirmed a positive divergence and broken its long term downtrend line.
3. We’ve seen nice follow through and are back above the previous rally’s closing high.
Additionally, commercial hedgers are not hedging at all, meaning that they think prices are heading higher from current levels. According to sentimenttrader data, commercial hedgers are net long roughly 72k contracts, which is a multi-year high and is nearing levels at which we saw prices move higher from in mid 2013 and early 2014.
Given that AUD/USD has met our weekly price target and has shown that buyers are stepping in at an important support level, I think that, in the least, there isn’t any reason to be short here. With hedgers positioning themselves for higher prices and prices being extended from the mean on both a weekly and daily timeframe, I think there is a possibility that we see a mean reversion back toward the 200 day moving average. I love this false breakdown on the daily chart and breakout in momentum. We still have to get back above the downtrend line up toward .83, but above that resistance doesn’t come in until around .8550 and .8650, which are two support levels seen on the daily chart. In terms of managing risk on the long side, aggressive traders can stay long above the previous rally attempts closing high of .8181, but those who want to give it more room to work can use the gray shaded area’s low of .8087 a level to stay long above. As long as we are closing above the pivot low below which prices put in the false breakdown, I’d say the bias is to the upside.
As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.