The Australian economy is heavily exposed to the Chinese one and the Australian Dollar is the top Chinese Yuan proxy currency. This is due to the availability of it on the open market and close economic relationship the two countries enjoy. Positive news flow in regards to trade talks between the US and China as well as goodwill gestures in delaying tariffs have provided a boost to the AUD/USD which resulted in a breakout above its support zone, marked by the grey rectangle. The strength of the bullish breakout sufficed to push this currency pair above its 38.2 Fibonacci Retracement Fan Resistance Level which has now turned into a descending support level.
What is the Fibonacci Retracement Fan?
The Fibonacci Retracement Fan is a different visualization of the Fibonacci retracement sequence which outlines important support and resistance levels in technical analysis. Those levels warrant a closer look and offer entry and exit levels for trades together with other aspects of the analysis.
The Force Index, a next generation technical indicator, has lead the breakout in the AUD/USD and completed one of its own above the 0 center line which has put bulls in control of price action. This technical indicator has started to retreat from its most recent high, but remains in positive territory which suggests that price action may retrace down to its 38.2 Fibonacci Retracement Fan Support Level before attempting its next move higher. The Force Index may dip into negative territory on a short-term basis as the AUD/USD is testing its support level. As long as the most recent low, marked by the green rectangle, won’t be violated, the uptrend will remain intact.
What is the Force Index?
The force index is considered a next generation technical indicator. As the name suggests, it measures the force behind a move. In other words, forex traders will get a better idea behind the strength of bullish or bearish pressures which are driving price action. The indicator consist of three components (directional change of the price, the degree of the change and the trading volume). This creates an oscillator which in conjunction with other aspects of technical analysis provides a good indicator for potential changes in the direction of price action. It subtracts the previous day closing price from today’s closing price and multiplies it by the volume. Strong moves are supported by volume and create the most accurate trading signals.
As bullish momentum in on the rise, the AUD/USD is expected to resume its advance and complete a breakout above its 50.0 Fibonacci Retracement Fan Resistance Level as well as above its 61.8 Fibonacci Retracement Fan Resistance Level. This will take price action to its next resistance zone which is located between 0.70325 and 0.70810, marked by the red rectangle. The likelihood of a 25 basis point interest rate cut by the US Fed next Wednesday is also weighing on the US Dollar. While such a cut is priced in, the extend of future interest rate cuts could further pressure the US Dollar to the downside. The current technical set-up together with the fundamental news flow favors more breakouts in this currency pair.
What is a Breakout?
A breakout occurs if price action moves above a support or resistance zone. A breakout above a support zone could signal a short-term move, such as a short-covering rally which occurs when forex traders exit short positions and realize trading profits, or a long-term move such as the start of a trend reversal from bearish to bullish. A breakout above a resistance zone signals strong bullish momentum and an extension of the existing uptrend.
Forex traders should closely watch the Force Index as it will give a clue of a retracement down to the 38.2 Fibonacci Retracement Fan Support Level will lead to more upside in the AUD/USD or if a breakdown will result in a full retracement back down to its support zone. Barring any fundamental surprise, especially in regards to the US-China trade war, bullish momentum is expected to further increase. The most recent intra-day high of 0.68941 will hold the key to the next breakout in price action which will also elevated this currency pair past its 50.0 Fibonacci Retracement Fan Resistance Level and bring the AUD/USD one step close to its resistance zone.
What is a Resistance Zone?
A resistance zone is a price range where bullish momentum is receding and bearish momentum is advancing. They can identify areas where price action has a chance to reverse to the downside and a resistance zone offers a more reliable technical snapshot than a single price point such as an intra-day high.
AUD/USD Technical Trading Set-Up - Breakout Extension
Long Entry @ 0.68600
Take Profit @ 0.70600
Stop Loss @ 0.67900
Upside Potential: 200 pips
Downside Risk: 70 pips
Risk/Reward Ratio: 2.86
A breakdown in the Force Index below its most recent low, prior to the breakout, and a move in the AUD/USD below its 38.2 Fibonacci Retracement Fan Support Level would result in a bearish development. This would turn the 38.2 Fibonacci Retracement Fan Support Level back into resistance and price action could enter a sell-off down into its support zone between 0.66765 and 0.67474. Such a breakdown into its support zone is not expected unless a fundamental event provides the catalysts for a breakdown.
What is a Breakdown?
A breakdown is the opposite of a breakout and occurs when price action moves below a support or resistance zone. A breakdown below a resistance zone could suggest a short-term move such as profit taking by forex traders or a long-term move such as a trend reversal from bullish to bearish. A breakdown below a support zone indicates a strong bearish trend and the extension of the downtrend.
AUD/USD Technical Trading Set-Up - Limited Breakdown Potential
Long Entry @ 0.67850
Take Profit @ 0.66800
Stop Loss @ 0.68300
Upside Potential: 105 pips
Downside Risk: 45 pips
Risk/Reward Ratio: 2.33
