Potential AUD/USD trade

AUD/USD is clearly consolidating below the 23.6% retracement of the September sell-off (at $0.8822) and looks to be establishing a short-term trading range of $0.8850 to $0.8650.

Source: Bloomberg

The question then is, will we see a resumption of the downtrend and, if so, what might be the best level to sell at?

Fundamentally, we seem to have hit a level that seems fair if one is to use a short-term valuation model incorporating volatility structures, swap or yields spreads. While longer-term-focused models suggest much greater downside if you take terms of trade and purchasing power parity (PPP) into consideration.

Technically, the pair looks like a sell on rallies. As you can see, at the beginning of the year we saw a five-wave sequence that ended on 1 July. As things stand, AUD/USD looks to be in the fourth wave of a new five-wave sequence, although it isn’t immediately apparent if the fourth wave has ended or we’re in the start of a fifth wave lower. To confirm the start of the fifth wave, we will need to see a close below $0.8660 (the January low), a feat the pair has failed to achieve during this period of consolidation.

If the fourth wave has still further to go, I would expect the counter rally to be capped at the 38.2% retracement of the September sell-off at $0.8933. This looks like strong resistance – the AUD bulls should find this level hard to break.

So, based on this wave structure, I would potentially look to work sell orders into $0.8933, or sell the pair on a daily close below $0.8660.

It’s also interesting that the 20-day moving average (in blue) is holding up play. This seems to be the preferred sell zone, which makes sense as the pair’s mean reverts within the downtrend. This could be another area that traders look to sell in the short term.

There seems to be some disagreement within the oscillators as the MACD is above the signal line. However, it is still well below zero, suggesting rallies will be contained within the bearish trend. Stochastics are looking ominously poised to head lower and are currently not indicative of a rally to $0.8933.

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