Technicals | Jun 06 2018
By Vic Patel, head trader and founder of Forex Training Group.
The AUD/USD currency pair has been on a downward trajectory since the beginning of 2018. What can we expect from the Aussie over the next few weeks and months? Well, we will look to answer that by analyzing the pair using a combination of Elliott wave, Fibonacci analysis and Price action techniques.
Short Term Analysis of AUD/USD
Based on the Short Term analysis of the AUD/USD pair, we are likely to see continued downward pressure over the next two weeks. Let’s take a closer look using the 10 hr. timeframe.
Starting on January 26th, 2018, AUD/USD began to trade lower and put in the Wave 1 bottom. From there we had a Running A-B-C Flat correction which ended on March 14, completing Wave 2. From there we saw a sharp down move begin after the end of Wave 2, which is quite customary for Wave 3 price action. Wave 3 is typically the largest wave within the Elliott Wave impulse sequence, and also the wave where momentum begins to expand. Within the current Wave 3 structure which we are currently in, we can see the subdivisions within that structure as well. Sub wave wv1 of Wave 3 ended on March 28th. Upon reaching the 61.8% Fibonacci retracement, wv2 of Wave 3 was put in. A sharp selloff ensued with the beginning of wv 3 which is to be expected, and currently we are trading in wv4 of larger degree Wave 3. Fourth waves tend to bring choppy price action, and this further bolsters our short term wave count.
Price action is trading in an upward channel and there is significant resistance at .7641. I expect a temporary rise in price, and a test of the .7641 horizontal resistance area and/or the upper channel. I would be looking to sell at the break of the lower channel line, which would confirm that we are in a wv5 and look for a final leg down with the larger WV 3 structure. Typically, we would look for a Target Zone that is within the 127% – 161% Fibonacci Extension of wv4. I have plotted those levels on the chart in blue. As we also have key support at .7327, it would be more prudent to set a target just before the 127% Projection at .7354.
Intermediate Term Analysis of AUD/USD
Based on the Intermediate Term analysis of the AUD/USD pair, we are likely to see further bearish price movement over the next 1 to 2 months. Let’s take a closer look using the daily timeframe.
Beginning on May 10, 2017, we started to see a sharp price increase in the AUD/USD pair which took us to the high of .8124. From that high (marked A), the price declined until it reached the 78.6% retracement of the XA leg. In fact, this was an almost perfect Fibonacci retracement which marked the end of the decline (marked B). From that point, prices started to increase steadily and eventually moved up to test the prior high of .8124. Though it surpassed the high, it could not hold and the AUD/USD fell sharply following the retest. Recently price has been testing the important support area at .7502.
As you can see from the image, and the swing points marked X, A, B, C and D, the mostly likely structure that is forming on the daily chart is the Butterfly pattern. The most important point within the Butterfly structure is Point B, and it should be a 78% retracement of the XA leg, which is exactly what we are seeing. The Butterfly pattern would most likely complete at Point D, which should be a 127% extension of the XA leg. You will notice this marked on the chart with the blue line at .7120. So, we expect price to take out the .7502 support area soon and, then prices should move lower to the next significant test of support at .7120.
Longer Term Analysis of AUD/USD
Based on the Longer Term analysis of the AUD/USD pair, we are likely to see continued selling pressure and a test of major support at .5995 over the next four to six months. Let’s take a closer look using the weekly timeframe chart.
Based on our long term Elliott Wave analysis for AUD/USD, Wave 1 was formed in October 2011, followed by a classic A-B-C correction leading to Wave 2 on April 7, 2013. From there, we can see the current wave count is within the Wave 3 structure, and the subdivisions have been noted. August 4, 2013 marked the low of wv 1 of Wave 3, and then we saw a running flat correction noted as A-B-C which ended in wv2 in late June 2014. As you can see, wv3 of WV 3 was a sharp leg down, which is to be expected, since 3rd waves typically have the strongest momentum within the impulse sequence. Then wv 3 ended on January 17, 2016 marking the low at .6829.
From there, we started to see overlapping price action with an upward sloping consolidation channel. This is typical of 4th wave price action. The week of April 22, 2018, price broke through and closed below the lower channel line, which confirmed our longer term bearish bias. Since then price action has retraced to retest the lower channel line and we expect prices to start moving lower heading into early June. The target zone for wv4 is the 127% – 161% Fibonacci price extension of wv 4. We have marked that zone with the blue lines. Also take note of the important support level marked at .6009. This low coincides with the Oct 2008 low, and prices should begin to find support in that area. The 161% extension at .6067 therefore would serve as the highest probability downside target over the longer term horizon.
Conclusion
Based on my analysis, the AUD/USD pair is head lower over the short term, intermediate term, and longer term time horizons. All three time scale frequencies are aligned, and as such there is a high likelihood of continued bearish price moves in the AUD/USD pair. I expect that AUD/USD will find support around .6000, which should be reached within the next four to six months. In the meanwhile, everything is pointing to a weaker Aussie, and traders would be prudent to trade from the short side in the meanwhile.
Vic Patel is head trader and founder of Forex Training Group http://forextraininggroup.com/
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