ASX 200, Australian Dollar, Volume Divergence, Coronavirus – Talking Points
- ASX 200 and Australian Dollar have been rallying on virus easing bets
- Negative volume divergence warns underlying weakness in the former
- Continuation patterns are brewing in the ASX and Australian Dollar
ASX 200 and Australian Dollar Gain as Technical Signal Shows Warning Sign
Since late March, the ASX 200 and sentiment-linked Australian Dollar have enjoyed the cautious improvement in market mood. The former climbed over 17 percent while AUD/USD gained over 6.5%. This has followed a combination of aggressive global fiscal and monetary stimulus. More recently, coronavirus case stabilization from parts of the United States and Europe seemed to have added momentum to equities.
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Yet trouble may be brewing ahead locally based on acute technical signals. Since the bounce in Australia’s benchmark stock index, volume has been notably on the decline – see chart below. The latter measures the total amount of shares traded for a given asset. In a healthy market, volume tends to rise alongside prices which is a sign of conviction behind trends.
Negative volume divergence on the other hand is a sign of underlying weakness and can at times precede a turn lower. These are volatile times in financial markets which arguably increases the importance of confirming key chart breakouts and aggressive moves. With that in mind, a turn lower in the ASX 200 could spell broad weakness for the Australian Dollar. AUD/USD and the ASX tend to move in tandem.
From a fundamental perspective, some volatility in local assets may be in store with the RBA rate decision on tap later today. Odds of a further 25-bp rate cut are near-even. I will be covering the announcement starting at 4:15 GMT– see link below. Down the road, the markets will continue weighing prospects of coronavirus stabilization against the anticipated souring in dismal economic data ahead.
( 00:04 GMT )
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ASX 200 Negative Volume Divergence
ASX 200 Technical Outlook
The ASX 200 seems to be forming an Ascending Triangle on the 4-hour chart. This is a continuation pattern where follow-through tends to be determined by the direction of the breakout. A push above 5410 with a confirmatory close above 5538 exposes the midpoint of the Fibonacci retracement at 5799. Otherwise a close under rising support from late March may pave the way for a retest of current 2020 lows.
ASX 200 4-Hour Chart
Australian Dollar Technical Outlook
My majors-based Australian Dollar index – averaging it versus USD, EUR, GBP and JPY – also seems to be within the confines of an Ascending Triangle. A push above 0.7431 on the chart below with confirmation may extend the bounce off March lows. On the other hand, a drop through rising support from last month may open the door to a general depreciation in the Australian Dollar as it weakens towards lows from the past two weeks.
Majors-Based Australian Dollar Index (4-Hour Chart)
— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com
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