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Chart: Australian dollar poised to rally from valley of death

John Phillips | Digital Editor | CNBC

Into the valley of death rode the six hundred and the Light Brigade emerged tattered but victorious, according to Tennyson.

The same story can be applied to the Australian dollar which at the beginning of 2016 looked to be heading towards $0.635 after a fall below the primary support level near $0.715. We suggested it was poised on the ledge of the valley of death. There were good short trades but in the longer-term, the Aussie has battled higher and retested $0.775.

The long and steady decline in the Australian dollar from $0.93 to $0.69 has paused and developed a significant reversal pattern. This is a classic Guppy Multiple Moving Average (GMMA) trend reversal. This has seen a test of the downtrend, a retest and breakthrough and then a retest and rebound. All these features are found in the GMMA display on the Australian dollar.

The test of the lower edge of the long-term GMMA developed in December 2015. The test and breakout above the upper edge of the long-term GMMA developed in April 2016. The retreat dropped below the lower edge of the long-term GMMA and this indicates a degree of trend breakout weakness. However, the Aussie is currently moving above the upper edge of the long-term GMMA and this is bullish.

The long-term GNMMA has compressed and begun to turn upwards. This is the first time this has occurred since the fall below $1.03 in May 2013, so it's a significant indication of a trend change.

The behavior of the long-term and the short-term GMMA is usually sustained with significant changes in the trend direction. This trend change is further confirmed with the uptrend line. This line needs to have a further successful retest before the line can be used with confidence.

The upside target for the Aussie is initially at $0.775. The Aussie trades in trading bands around $0.08 wide. This sets the next upside target near $0.855. It will be a long, slow ride to this target and any progress will cause great concern to the Australian central bank. Despite strident comments about alleged currency manipulation by China, but not Japan, there is little doubt that the Reserve Bank of Australia will implement a variety of measures to weaken the Australian dollar.

We use the ANTSSYS method to trade the rally towards $0.775 and the retreats back to the value of the trend line. The Aussie offers many short-term trading opportunities within the context of a longer-term bullish breakout above $0.775.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, available from www.guppytraders.com.. He is a regular guest on CNBCAsia Squawk Box and a speaker at trading conferences in China, Asia, Australia and Europe.

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