After price action in the AUDUSD was rejected by its 61.8 Fibonacci Retracement Fan Resistance Level, bearish pressures mounted and a sell-off followed. The rejection is marked by the red rectangle in the chart. The sell-off took this currency pair into its next support zone from where bearish pressures started to fade and a sideways trend followed; this is marked by the grey rectangle. The sideways trend suggests that the current sell-off has been exhausted. Economic data released out of Australia as well as China surprised to the upside with an unexpected expansion in the manufacturing sector for August. Australia is very dependent on China and the Australian Dollar is the top Chinese Yuan proxy trade, it is therefore important to monitor Chinese data for all Australian Dollar trades.
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 recovered from its lows it reached as price action descended from its 61.8 Fibonacci Retracement Fan Resistance Level to the bottom of its support zone. The AUDUSD is currently trading inside of this support zone, but as the Force Index continues to advance towards the center line, a breakout is expected to follow. A sustained move above 0.67474 could trigger a short-covering rally which can take price action back into its 50.0 Fibonacci Retracement Fan Resistance Level. While this would keep the long-term bearish trend alive, more upside is likely to follow if fundamental data will provide the next catalyst. This would turn the short-covering rally into a trend reversal
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.
In the AUDUSD, the Force Index has started to advance and is now approaching the center line. This is marked by the green rectangle. As visible, the Force Index remains in negative territory while bears have been in control. The ascend in this technical indicator shows that bearish pressures are receding and a move into positive territory would result in a momentum change from bearish to bullish. Price action may push above its support zone and the 0.67474 level before the Force Index is able to advance above 0, but once the move is confirmed it is likely to attract more net long-term buy orders and further extend the advance.
What is a Support Zone?
A support zone is a price range where bearish momentum is receding and bullish momentum is advancing. They can identify areas where price action has a chance to reverse to the upside and a support zone offers a more reliable technical snapshot than a single price point such as an intra-day low.
With price action hovering just above its most recent intra-day low of 0.66765, forex traders may approach the AUDUSD with caution. The latest round of tariffs in the trade war between the US and China was implemented yesterday which has supported the corrective stance in this currency pair. As long as the Force Index continues its uptrend and approach of the center line, set at 0, the support zone should hold. A reversal in this technical indicator would increase the chance for a breakdown in price action. For the time being, a breakout scenario is dominant even if the duration of such a move could be short-term. The upside potential of such a move currently outweighs the downside risk.
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.
AUDUSD Technical Trading Set-Up - Breakout Scenario
Long Entry @ 0.67200
Take Profit @ 0.70200
Stop Loss @ 0.66300
Upside Potential: 300 pips
Downside Risk: 90 pips
Risk/Reward Ratio: 3.33
A breakdown in price action will occur if the AUDUSD completes a sustained move below its intra-day low of 0.66765 confirmed by a contraction in the Force Index. In this case, the current downtrend is likely to extend and the Australian Dollar would further contract to decade lows not seen since the aftermath of the 2008 global financial crisis.
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.
AUDUSD Technical Trading Set-Up - Breakdown Scenario
Short Entry @ 0.65800
Take Profit @ 0.63300
Stop Loss @ 0.66750
Downside Potential: 250 pips
Upside Risk: 95 pips
Risk/Reward Ratio: 2.63