AUD/USD Completes An Inverted ‘Head And Shoulders’

AUD/USD traded higher on Wednesday, breaking above the 0.7235 resistance (now turned into support) barrier, defined by the peak of the 4th of September, which is also slightly below the inside swing low of the 24th of August. In our view, although the pair continues to trade below the downtrend line drawn from the peak of the 16th of February, on the 4-hour chart, it has completed an inverted head and shoulders formation. Thus, we would expect the current recovery to continue for a while more.

We expect the bulls to stay in the driver’s seat and perhaps challenge the 0.7275 zone soon, defined by the inside swing low of the 29th of August. If they prove strong enough to overcome that hurdle, then we may experience extensions towards the peak of the next day, at around 0.7315.

Looking at our short-term oscillators, we see that the RSI edged higher and now appears ready to cross above its 70 line, while the MACD lies above both its zero and trigger lines, pointing up as well. These indicators detect strong upside speed and support the case for the pair to continue drifting north for a while more. That said, given that the RSI appears ready to enter its extreme positive zone, we would stay cautious of a possible return move after the pair hits the 0.7275 resistance, perhaps for a test at the 0.7235 barrier as a support this time.

However, in order to abandon the bullish case, we would like to see a clear and decisive dip back below 0.7220. Such a move would bring the rate back within the sideways range where the head and shoulders was formed and may cancel the short-term reversal. The bears may be encouraged to push the battle towards the 0.7190 level, the break of which could open the path for our next support of 0.7145, near the lows of Monday and Tuesday.


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