As you can see on the weekly chart, we have formed a hammer at the 1.10 level during the course of the final week for July. That being the case, the market looks as if we are reaching an inflection point. After all, were going to have to break out of this range one way or the other, and although the hammer is rather supportive, it is not until we break the top of it that I feel you can use it as a buying opportunity. On the other hand, you have to keep in mind that if you break down below the bottom of the hammer, that also means something as well. After all, it’s a major breach of support.
If we break down below that support, I think the market probably goes down to 1.05 given enough time. At that point in time I would basically become a “sell only” trader when it comes to this pair. With that, the market should be volatile, but quite frankly I feel that it would be a very negative sign for the Australian dollar.
On the other hand, we could break higher
If we break higher, and above the top of the hammer, I feel the market then goes back to the 50% Fibonacci retracement level. The 1.135 level would be what we would be aiming for, and at that point in time I would be buying this pair going forward, on the dips as the market still would be volatile, but it would certainly would be a fairly positive sign. In the meantime, quite frankly I think it’s just a matter which way we break out of this range in order to decide where this month goes. Even mind that August is a very illiquid trading environment though, so quite frankly this could be a real sleeper for the next several weeks.