Starting in January, the Australian dollar developed a strong rally. The rally has technical limits and two significant resistance features which may act to cap the rise and drive the Australia dollar into weakness.
When applying technical analysis indicators, it is important to know when not to apply a particular indicator. We use Guppy Multiple Moving Average indicator analysis to identify trend strength and changes. In these situations it is a powerful analysis tool. The Australian dollar chart does not have these features. Instead, the Australian dollar is confined by a long term sideways trading band starting in 2016 April.
This is a non-trending environment and GMMA analysis is not a useful analysis tool. Instead, analysis is better applied using support and resistance levels and trend lines.
The Australian dollar weekly chart has a well-defined resistance level near $0.775. The $0.77 to $0.775 resistance level has been tested 8 times in the past 10 months. There is a high probability this level will again act as a successful resistance level with the Australian dollar developing a rapid retreat.
A second resistance feature is the upsloping trend line. The anchor point for this trend line is the low of $0.68 in 2016 January. The second anchor point is the low of $0.715 in 2016 June. This trend line acted as a support level until November 2016 when the Australian dollar plunged to $0.73.
The uptrend line remains important because it acts as a resistance feature in the future. The line is projected forward and given a current value near $0.775. This is the same value as the historical resistance level so this provides a double resistance feature which increases the probability of an Australian dollar retreat from near $0.775. Any retreat can be very rapid as shown in the period 2016 November to the end of 2016 December when the Australian dollar fell from $0.75 to $0.715.
The lower level of the trading band is support near $0.705, which is not a well-established historical support level. Between 2015 August and 2016 March this level was a central oscillation level. The Australian dollar moved as low as $0.69 and as high as $0.73. However this level acted as a support rebound level in 2016 May and again in 2016 December. There is a good probability this level will again act as a support level as the Australia dollar retreats from resistance near $0.775.
This is not a trending market so there is a better probability that the Australian dollar will continue to trade between the upper and lower limits of the trading band.
The Australian dollar provides good opportunities for traders and we continue to use the ANTSYSS trade method to extract good returns from these movements. Investors will take profits as the Australian dollar nears $0.775. New investors and tourists need to exercise patience in anticipation of a retreat back towards $0.715.
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia. He runs training, analysis and resource workshops for retail and professional financial market traders involved in stocks, CFDs, warrants, derivatives, futures and commodities in China, Malaysia, Singapore and Australia. He has his own trading company, guppytraders.com.