×

Australian dollar set to break out, analysis points to move higher

Dominic Lorrimer | Getty Images

The upward-sloping triangle pattern on the Aussie chart graphically illustrates the conflict between supply and demand for the currency.

The pattern is formed with a horizontal resistance level, which can considered as a measure of supply. Price fails to move above this resistance line as the supply of sellers overwhelms the demand from buyers.

The second part of the pattern is an upsloping trend line, which shows the changing levels of demand. The line slopes upward because buyers enter the market more aggressively to take positions as the price falls and, worried about missing out, they bid higher to get a position.

The result of these two influences is an upsloping trend line. In equity markets this is a powerful measure of crowd psychology. It has the same function in currency markets, but not quite a powerfully because many currency traders are forced to take the opposite side of their clients' transactions, irrespective of their view of the market direction.

However the pattern remains a strong predictor of upside breakouts. The depth of the base of the triangle is measured and this valu projected upwards above the resistance line to set an upside target. Again, this method is reliable with equities, but applied with caution in FX markets.

If price breaks below the trend line, then the same value is projected downwards from the point of the breakdown to set the downside targets.

Sometimes the breakout fails to develop and as the price action approaches the apex of the triangle, the price moves sideways in a prolonged, listless pattern. But this is an unusual outcome.

The AUD shows a long-term upward sloping triangle pattern. It's not a perfect pattern but it does suggest that demand is running stronger than supply. The upside target for a breakout is near $0.84. The downside target is near $0.69, which would keep the Australian Reserve Bank very happy.

Its too early to know which direction the Aussie will break but when it does, there's a high probability it will move quickly towards the price projection targets. On balance, the Guppy Multiple Moving Average relationship suggests an upside breakout. The final compression point in the triangle pattern is in February 2017.

We use the ANTSSYS method to trade these breakouts and also the increasingly compressed movements between the value of the trend line and the resistance level.

Daryl Guppy is a trader and author of The 36 Strategies of the Chinese for Financial Traders, available at guppytraders.com. He is a regular guest on CNBC's Squawk Box and a speaker at trading conferences in Asia, Australia and Europe.

Follow CNBC International on Twitter and Facebook.