A rebound in the Aussie seen in the charts may be temporary if the dollar gains

Key Points
  • The Aussie has strong support at $0.77 to the dollar , technical analyst Daryl Guppy says.
  • The Australian currency could retest resistance highs near $0.81
John Phillips | Digital Editor | CNBC

The Australian dollar has slipped from a peak of $0.81 to a low of $0.79 before developing an uncertain rebound.

Can the Australian dollar find genuine support near $0.71 or is Australian dollar weakness going to continue to develop? This is the first question traders are asking.

Alternatively, is the underlying uptrend strength solid enough to develop a sustainable rebound and breakout above resistance near $0.81? This is the second question, usually asked by investors with a longer-term view of the market.

It is difficult to ignore the performance of the dollar, as Aussie strength is often a direct consequence of weakness in the U.S. currency, which had fallen recently to $0.91 on the dollar index chart.

The mild dollar recovery to $0.93 has coincided with the weakness in the Australian dollar.

Although the Australian dollar may be driven by the strength of the dollar, it is the behavior of the Aussie that sets the breakout targets.

Guppy chart 171023 Asia 

The key part of the answer to both questions is the strength of support near $0.77 and the strength of the uptrend as revealed by the Guppy Multiple Moving Averages (GMMA).

We use this indicator analysis to identify trend strength and trend changes.

Trend confirmation comes when the long-term GMMA is well separated because this shows the investors are confident of trend continuation. Currently the long-term GMMA has the greatest degree of separation it has shown in 12 months. After a prolonged period where the long-term GMMA separation was very narrow, it moved upwards and developed good separation. This usually indicates solid trending behavior.

The Australian dollar is testing long-term support near $0.77. This was a strong resistance level from April 2016 to July 2017, signaling this level can provide a strong support feature.

The combination of this strong support feature and the good separation in the long-term GMMA suggests the Australian dollar will rebound and retest the resistance highs near $0.81.

However, given the historical relationship between the Australian and U.S. dollars this rally is likely to be temporary. The two currencies have an inverse relationship that is led by the dollar.

Ultimately dollar strength will translate into Australian dollar weakness.

This suggests the Australian dollar rebound rally strength is temporary unless the dollar resumes its downward trend. Technically the Australian dollar is poised for a rebound, but this rebound is threatened by the potential for the dollar to move above $0.93.

We use the ANTSSYS trade and analysis method to identify the opportunities as the trend develops. A sustained rebound above $0.77. is a signal for trend continuation towards $0.81.

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.