AUD/USD: The huge head-and-shoulders pattern that every FX trader is watching

AUD/USD is one of the most compelling technical setups to take advantage of the recent US dollar strength

Australia

As we noted in yesterday’s analysis of EUR/USD, the US dollar has been on tear over the last month, reversing its trend of relative weakness over the previous three quarters.

The recent moves have flipped the technical bias in favor of the greenback against most of her major rivals, but arguably the most compelling technical setup is in AUD/USD, which has carved out a huge head-and-shoulders pattern over the last three months. For the uninitiated, this classic pattern shows a shift from an uptrend (higher highs and higher lows) to a downtrend (lower lows and lower highs) and often marks a significant top in the chart.

The pattern is typically confirmed by a break below the “neckline”; in this case, the neckline can be represented either by the ascending trend line near 0.7650 (already broken) or the horizontal support level at 0.7560 (still intact). As the chart below shows, the 100-day EMA also comes in near 0.7600, providing another reason to monitor the 0.7560-0.7600 zone as a significant long-term area:

Source: StoneX, TradingView

For traders looking to short AUD/USD, one potential strategy would be to wait for rates to confirm the break below 0.7560 to enter a trade with a stop above 0.7600 or 0.7650 with targets at either the 200-day EMA near 0.7400 or even the head-and-shoulders pattern’s “measured move” objective in the lower 0.7000s. Meanwhile, if AUD/USD is able to hold support and rally above 0.7700, it would erase the near-term bearish bias

Key Australian and US data to watch in the coming week:

  • Monday: n/a
  • Tuesday: US Consumer Confidence
  • Wednesday: US ADP Employment Report
  • Thursday: AU Retail Sales, US ISM Manufacturing PMI
  • Friday: US Non-Farm Payrolls

Learn more about forex trading opportunities.


Build your confidence risk free

More from Forex

Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.