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Australian Dollar May Drop After AUD/USD Completes Wedge Pattern

AUD/USD TECHNICAL ANALYSIS:

  • AUD/USD completes Rising Wedge pattern, hinting at weakness ahead
  • Initial support seen just above the 0.72 figure, resistance starts at 0.7413
  • Major H&S topping pattern argues for downside target near 0.7120-30

The Australian Dollar may be set to resume the downtrend traced out from the swing high in early May. AUD/USD spent the better part of a month in consolidation mode after breaking below support clustered around the 0.74 figure. That churn carved out a Rising Wedge pattern, which typically serves as a bearish setup (reflected in progressively shallower upward swings, which speaks to fading bullish momentum).

Confirmation of the Wedge pattern’s completion now seem to be at hand after the currency pair issued a daily close below its lower bound. This appears to mark downtrend resumption, setting the stage for a descent to challenge the next meaningful support layer in the 0.7222-44 inflection zone.

Broadly speaking, the selloff now in play follows the formation of a Head and Shoulders (H&S) topping pattern, developed since the start of the year and finally confirmed with a telltale break through “neckline” support in mid-June. If prices manage a daily close through 0.7222, the downside objective implied by that pattern in the 0.7120-30 area comes into view. The 0.70 figure follows shortly thereafter.

Neutralizing immediate selling pressure probably calls for prices to re-establish a firm foothold above 0.7413. From there, making the case for lasting gains would probably demand overcoming a dense resistance bloc running up from the lower bound of the H&S neckline and through a pivotal congestion region extending out to 0.7705. Failing that, short-term gains may be seen as corrective in the context of a broader decline.

Australian Dollar May Drop After AUD/USD Completes Wedge Pattern

AUD/USD daily chart created with TradingView

AUD/USD TRADING RESOURCES

— Written by Ilya Spivak, Head Strategist, APAC at DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter