AUDUSD Weekly: Head and Shoulders Completion Signals Further Decline

07 Dec 2021

AUDUSD has started the week in the green after 5 consecutive weeks of steep decline. Looking at the weekly chart, the technical setup for the commodity pair seems to favour the bear in the coming months. In this article, we will share a few observations that indicate further weakness for the Australian dollar.

Death cross paves way for further decline

Firstly, the validation of a downtrend in the AUDUSD was marked by a death cross on the weekly chart. The death cross is a bearish signal whereby the shorter term 50 period moving average crossed below the long term 200 period moving average trend line. After the death cross, the price tested the 200 period moving average once more but formed a bearish engulfing candlestick and triggered losses for 5 straight weeks.

Head and shoulders completion

Moreover, the completion of a huge head and shoulders chart pattern dating from July 2020 signals a continuation to the downside. Head and shoulders pattern can be identified after an uptrend with 3 peaks supported by a common neckline support: first and third peaks being almost equal in height and the second peak being the tallest. This bearish reversal pattern signals a waning buying power. Moreover, at the top of the “head”, AUDUSD also made a double top pattern which is another tell-tale sign that prices have peaked and is bound for a reversal. The confluence between the two chart patterns builds a convincing case of a bearish AUDUSD.

Increased indecision with broadening triangle

After the break below the head and shoulders neckline, the pair found support and rebounded from 0.70 which is a historical support level. From this latest price movement, we can identify another emerging chart pattern – broadening triangle. This formation is observed when the gap between the upper resistance and lower support line creates a widening gap, signalling increased volatility and indecision between the buyers and sellers. While prices could either break above or below this relatively neutral pattern, the odds of an upside break may be less as there are multiple resistances. These formidable resistance levels include the head and shoulders neckline support-turned-resistance, as well as the 50 and 200 period simple moving average trend lines.

Technical Indicators

Technical indicators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) paint a similar discouraging picture for the Aussie. After a dead cat bounce in second half of October which saw the RSI rise above 54, the reading was rejected back into the bearish zone in November and it has since trended lower. On a downtrend, RSI tends to stay below the neutrality area at 50. The 50 RSI line also serves as the overbought region when prices are in a bearish trend. On the other hand, the MACD also indicates that bearish momentum is in full swing with the histogram in the negative region and below the signal line.

 

Price Projection

Looking ahead, we forecast that the AUDUSD will extend limited gains to retest the head and shoulders neckline support-turned-resistance level at R1 (0.7148). If price retraces from the level upon a failed retest, the bearish outlook for the pair will be validated and traders could expect to achieve the head and shoulders downside target at 0.6335. In the alternate scenario of a failed neckline retest, R2 (0.724) would provide resistance for the pair.  

Tuesday, December 7

USD – Good and Services Trade Balance (Oct), Nonfarm Productivity (Q3), Unit Labor Costs (Q3)

Wednesday, December 8

AUD – RBA’s Governor Lowe speech

USD – Initial Jobless Claims (Dec 3), Initial Jobless Claims 4-week average (Dec 3)

Thursday, December 9

USD – Consumer Price Index (MoM)(YoY)(Nov), Consumer Price Index Core s.a(Nov), Consumer Price Index ex Food & Energy (MoM)(YoY)(Nov), Michigan Consumer Sentiment Index (Dec).


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