The Australian dollar has developed a strong breakout above the upper edge of a long term trading band.
This breakout comes at a time when the Australian market is one of the weakest performing globally. It lags the U.S., U.K., German, Singaporean, Taiwanese, Malaysian and Korean markets by substantial amounts.
It's not economic strength that is driving this breakout.
The Aussie strength is a direct consequence of weakness in the U.S. dollar, which in itself reflects the deep disillusionment with President Donald Trump's policies and endless tweets that defy reality.
The trading band is the most significant feature on the AUD chart. The upper edge of the trading band near $0.775 was established in April 2016. The lower edge of the trading band near $0.715 was first tested in June 2016. The trend behavior since then has been weak with the Australian Dollar essentially moving sideways.
In November 2016 the Australian dollar retreated strongly from resistance near $0.775 and by December that year was testing the support level near $0.715. The rebound rally from this level confirmed the strength of the trading band.
The sharp fall from $0.775 to $0.715 and the sharp rallies from $0.715 to $0.775 offered good trading opportunities, but they do not indicate strong trend changes. The breakout above $0.775 is significant because it's the first strong move in 18 months. A breakout above that level can move rapidly to the next resistance feature.
In the longer term, the width of the trading band can be projected upward to set a target near $0.835. This target is treated with caution and used as a guide only.
We use Guppy Multiple Moving Averages indicator analysis to identify trend strength and trend changes. In those situations it is a powerful analysis tool. The GMMA is not the best indicator to apply to understand a sideways market. The current breakout has triggered a change in the GMMA, but it's too early to know if this breakout is sustainable based on GMMA analysis. Trend confirmation comes when the short term GMMA moves above the upper edge of the trading band. This will be the key leading indicator.
This non-trending environment shows no signals of trend change and GMMA analysis is not a useful strategic analysis tool. However, trend line and trade band analysis allows the trader to identify the significant trend break points and establish targets.
Despite the rally breakout, this is not yet a trending market, so traders apply short-term trading methods to capture the rally and retreat behavior. We use the ANTSSYS trade and analysis method to identify the opportunities as the rally develops. The behavior of the AUD rests on Trump's behavior so the leading signals come from the U.S. Dollar.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.