The EUR/AUD has completed a breakout above its support zone which is located between 1.59054 and 1.6012, marked by the grey rectangle in the chart. Price action advanced after the ECB announced the re-start of its quantitative easing program and after it delivered a 10 basis point interest rate cut in its deposit facility rate to -0.50%. This breakout has now ended the sell-off in the EUR/AUD and the 38.2 Fibonacci Retracement Fan Resistance Level is now the next level to monitor as it will dictate price action moving forward. The Australian Dollar remains vulnerable to Chinese economic data which this morning showed a weaker than expected reading in industrial production as well as in retail sales.
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 formed a very shallow positive divergence as marked by the green rectangle prior to the breakout above its support zone. This technical indicator remains above the 0 center line and confirms that bulls remain in control of price action. As the EUR/AUD approached its 38.2 Fibonacci Retracement Fan Resistance Level, price action stalled which is normal following a breakout which is approaching its next major resistance level. The Force Index may trade in-and-out of positive territory, but as long as the general uptrend can be maintained the breakout is expected to extend further to the upside.
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.
Forex traders should now monitor price action as it once again moves in on the 38.2 Fibonacci Retracement Fan Resistance Level together with the level in the Force Index. The next key price level for the EUR/AUD is its most recent intra-day high of 1.61670 from where the breakout stalled. A move above this level would also take price action above its 38.2 Fibonacci Retracement Fan Resistance Level and could turn the breakout into a bigger advance, if it will be confirmed by a new high in the Force Index.
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.
An extension of the breakout should take price action above its 50.0 Fibonacci Retracement Fan Resistance Level and into its 61.8 Fibonacci Retracement Fan Resistance Level which is about to descend below its next resistance zone. This zone is located between 1.6634 and 1.64535. A move into its 61.8 Fibonacci Retracement Fan Resistance Level will keep the long-term downtrend intact and a new fundamental catalyst would be required in order to push the EUR/AUD further to the upside. The US-China trade talks in October are likely to provide the next major fundamental catalyst to the upside or downside.
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.
EUR/AUD Technical Trading Set-Up - Breakout Extension Scenario
Long Entry @ 1.61000
Take Profit @ 1.63500
Stop Loss @ 1.60150
Upside Potential: 250 pips
Downside Risk: 85 pips
Risk/Reward Ratio: 2.94
This morning’s disappointment in Chinese economic data is likely to keep the Australian Dollar, the top Chinese Yuan proxy currency, from advancing. A proxy currency is used by forex traders when the target currency, in this case the Chinese Yuan, is not as available or as liquid as required. Forex traders then seek an alternate currency with heavy exposure to the target currency, in this case the Australian Dollar. Should the Force Index break its uptrend and sustain a move below 0, a retracement of the current breakout is possible. This could take the EUR/AUD back down to its intra-day low of 1.59054 which forms the bottom range of its support zone.
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.
EUR/AUD Technical Trading Set-Up - Retracement Scenario
Short Entry @ 1.60500
Take Profit @ 1.59100
Stop Loss @ 1.61000
Downside Potential: 140 pips
Upside Risk: 50 pips
Risk/Reward Ratio: 2.80