AUDUSD

Bearish divergence on AUDUSD difficult to ignore

One of the currency pairs gaining most since the start of the Coronavirus pandemic has been the AUDUSD pair. After an initial drop in late March, it climbed above a level of 0.7, following closely U.S. stock market indices.

However, cracks are starting to show in the bullish run. Despite the USD continuing to be trashed across the board, AUDUSD is starting to look tired at the current levels.

U.S. GDP sends USD lower

As news came in yesterday that the U.S. economy shrank by over 30% between April and June of this year, investors responded immediately by selling USD. Nevertheless, traders should pay attention to the advanced GDP based on annual data, meaning the U.S. economy did not actually contract by a third, but by 10%. Therefore, what may have seemed like a dramatic decline was largely an alarmist headline.

AUDUSD formed a bearish divergence on the 4h chart

The AUDUSD pair continued its march above the 0.7 level, despite signs of exhaustion on the U.S. stock market. Fuelled mostly by USD weakness rather than AUD performance, the AUDUSD pair found further support in the recent strong run on the gold market.

The bearish divergence on the 4h chart, nevertheless, should not be ignored. Moreover, the AUDUSD pair formed a rising wedge – another bearish reversal pattern.

Having said that, trading bearish reversal patterns is not for everyone. Conservative traders might not like it as it often leads to extreme market moves. In other words, the market may stay divergent more than the trader remains solvent. For this reason, the safest way to trade such reversal patterns is to wait for a break. Or, for proof of life, if you like.

In the case of the AUDUSD pair, wait for the market to break a hundred points lower – 0.7120. Next, go short there with a stop-loss at the highs. Finally, measure the distance from the entry to the highs and project it twice to the downside from the entry place.

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