An oversold market, thin trading conditions and good economic data from China helped drive the AUD/USD higher on Monday. With the U.S. on bank holiday, the major players were out of the market, allowing counter-trend buyers to take control. This may have helped trigger the potentially bullish closing price reversal bottom. The chart pattern does not represent a change in trend, but could provide relief from the oversold conditions.
Besides the oversold technical indicators and thin trading conditions, encouraging news from China helped boost the Aussie against the U.S. Dollar. Chinese GDP grew by 7.7 percent last quarter. This was above economists’ estimates of 7.6 percent. Better than expected industrial production data also helped encourage shorts to pare positions. This report showed that industrial output rose by 9.7 percent last month.
The rally is likely to be short-lived because traders believe the strengthening U.S. economy will offset today’s move. On Tuesday, there are no major U.S. economic reports which suggests shorts may continue to cover until they get another signal to short again or when the market reaches a value zone.
Daily AUD/USD Chart
The technical closing price reversal bottom often leads to the start of a 2 to 3 day rally equal to at least 50% of the last break. The current range is .9085 to .8756. This makes .8920 a potential upside target over the next few days. Since the main trend is down, sellers are likely to step in on the first test of this level.
One problem with this reversal is that it came on the fifth day from the top. The best reversals usually occur 7 to 10 days from a top. The key to the pattern is the follow-through. Today, the market will have to take out .8820 with conviction to confirm the bottom. Even if it does this, it will still have to take out a steep downtrending angle at .8845. Once these areas are cleared, upside momentum may increase, giving the Forex pair the power to reach the minimum objective at .8920.
If there is no follow-through or if it is limited, then the market may revisit the downside with .8788 the first objective. If this level holds and a secondary higher bottom forms on an intraday chart, then look for another surge to the upside. If .8788 fails then the reversal is likely to be negated on a move through .8756. If this occurs then watch for a reversal later in the week once the move enters the 7 to 10 day window of time
Written by FX Empire