Australian Dollar Outlook before London open

As long as price doesn’t break down the 0.9540 level (strong support at November 2010 lows and near the daily SMA200) we can’t really say that we are into a formal bearish reversal yet. And there is another strong support area at the 161.8% extension level from this week’s swing low, which ranges from 0.9460 to 0.9415 approximatively.

However, we are at a critical level on the weekly time frame, with price struggling above the SMA34 which seems to be holding by now. I would expect some consolidation between the actual price (0.9790/0.9800) and the middle line of the Bollinger bands which is the recently broken level to be retested at 0.9980 barely below parity. However and as said in my previous article, 0.9860/70 has to hold firmly as support if we want to consider a reversal back to the bullish scenario. We have entered a sort of “no-man’s-land” and more definitive views on price action will be given to us after the London opening. Should the present level break down again, and pass through yesterday lows, we are headed towards the previous November 2010 lows at 0.9540 and possibly even 0.9420 which is the weekly 38.2% retracement on the long ascending move that started mid-2010.

A projection of an hypothetical inverted head and shoulders formation on the 4-hour charts (260 pips from 0.9710 to 0.9970) gives us a target level around 1.0230. We are still far from any move which confirms that the pattern will effectively come into play, but the possible outcome of such a projection fits into the possible bullish target scenario, should we reverse from this week’s prolonged fall.

Here again on hourly charts, we might attempt to reach 0.9870/90 (61.8% Fibonacci retracement on the bearish move and confluence area of the middle line of the Bollinger bands and SMA34), as well as the upper trend line of the descending channel.

As said above, the consistance and strength of this level as a support will be determinant for a return to the bullish views or, contrarily, if it holds as a resistance, we will be revisiting yesterday lows at around 0.9700 which, if broken, will lead to the successive downside targets at 0.9650, 0.9600 and 0.9550/40 (November 2010 lows and neckline of another hypothetical head and shoulders formation on the weekly charts). The range to the top of the head (all-time highs at around 1.0250) gives us a potential for a 700-pip fall from that level on a longer term (0.8850/0.8770 range, at August 2010 lows).