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The little Aussie performer

May 1, 2014
1 person likes this post.

I haven’t seen the term “little Aussie battler” used for some time when referring to the Australian dollar so let’s give it another name, the “little Aussie performer”, well at least for the time being.

Despite the majority of the nation, including the Reserve Bank, doing their utmost to will the AUD down against the USD it seems to defy all and sundry and continue showing strength just when we all think that it will deliver our collective wishes and fall. Having risen from a low of just below 87c to a recent high of 94.61c, where might it head from here?

Inverse Head & Shoulders at a strong support zone

Another article and another technical analysis pattern, this time the inverse Head & Shoulders pattern. This pattern is highlighted in the daily chart below, which spans a year, by the three ellipses. The green ellipse is the ‘head’ and the magenta ellipses are the two ‘shoulders’. The ‘neckline’ between the two ‘shoulders’ is shown by the black descending trend line. Note that the right ‘shoulder’ has a higher trough than the ‘left’ shoulder.


Source: Beyond Charts

The inverse head and shoulders is a high probability reversal pattern that occurs at trend bottoms. It is the inverse of the head and shoulders pattern, also a reversal pattern, which occurs at trend tops. This particular inverse head and shoulders occurred at a strong support zone which is shown by the bold blue rectangle that ranges between just below 87c and just above 88c. The support zone is determined by past peaks and troughs that occurred in the AUDUSD chart, which are not shown above but which I save on my personal AUDUSD chart.

The reversal in trend is confirmed when the price rises and closes above the neckline, which occurred on the 6th March when the AUDUSD closed at 90.88c. This was the signal to buy the AUD against the USD, especially for those that hold USD assets and need to hedge their USD holdings.

On 6th March the AUDUSD also completed a 5 day swing high close which is one of the criteria that I use to determine when to hedge my USD portfolio that I trade on the NASDAQ. I use this technical analysis technique in conjunction with a momentum indicator called the SIROC because not every reversal and breakout occurs with a near perfect inverse head and shoulders as occurred on this occasion. On Friday 7th March I published on our customer Forum that I had bought the AUDUSD to hedge a portfolio traded on the NASDAQ in USD.

So where to from here for the AUDUSD?

There is no doubt that the AUD is in a text book upward trend against the USD. It appears that the AUDUSD spot price is heading for the resistance zone above the current price, which is shown on the chart by the middle blue rectangle between 95.25c and just below 98c.

The current retracement should find support at the bottom upward angled bold red trend line and then continue rising towards the upper part of the rising channel and towards the resistance zone.

Of course the AUDUSD might fall directly from current levels. If so, a trailing stop loss could be placed at just below 92c. If the AUDUSD continues to rise from here and makes a new high above the recent high of 94.61c then the stop should be raised to just below 93c which is where the currently forming trough is. For myself I will be watching the SIROC momentum indicator that I use for a potential exit. Until then I will remain long the AUD against the USD.

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1 person likes this post.

Comments

  • Shawn says:

    Hi Gary

    May I ask what the SIROC momentum indicator actually is?

    Thanks

  • Gary Stone says:

    Response to Comment by Shawn:

    The SIROC is a smoothed momentum indicator that is indexed between 0 & 100.

    It is a little more smoothed than a MACD and oscillates between 0 & 100 like a stochastic or RSI.

    Think of it as a smoothed stochastic.

    However, the SIROC from Share Wealth Systems doesn’t move like a typical momentum or ROC (Rate of Change) indicator in that these will rise when the rate of decline slows (i.e. can rise while price is still falling), or fall when the rate of rising slows. The SWS SIROC requires the price to actually change direction before it changes direction.

    You may find other SIROC’s discussed around the traps all of which move like a typical momentum / ROC indicator.

    SIROC stands for Smoothed Indexed Rate of Change.

    Regards
    Gary

  • Shawn says:

    Thanks for the reply, Gary.

    Is it possible to see some examples on charts of the SWS SIROC, please? Perhaps that might make an interesting article for the blog?

    Thanks

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