Technical analysts have seen several clear-cut opportunities to enter the market over the past two trading days as several currency pairs and commodities approach significant resistance levels. Classic reversal patterns has successfully played out in both gold and the S&P Index. The reliability of these candles patterns at important resistance levels reinforces that often the most straightforward trading decisions are the most successful. The mantra of keeping it simple certainly applies with these clear-cut examples.
Gold has formed a classic reversal candlestick pattern, known as an evening star, since its indecisive trading at the resistance level on Friday. This has played out over the course of today and reaffirms that perhaps the momentum in gold does not exist to take it back above the $1750 level. Evening star patterns are particularly reliable and are made all the stronger when this price action occurs at a level of historic support or resistance. The only thing getting in the way of what would be considered a bearing outlook for gold is the markets waning risk appetite which would usually help to support gold but at its high price this seems an expensive option in comparison to the USD. The outlook for the USD is therefore looking increasingly bullish after a turbulent 48 hours for both high yielding currencies and, particularly, European financial shares.
The USD’s negative correlation with the S&P500 reflects this increasing demand for the safe-haven currency. The S&P500 has been heavily discounted as it too displays the technical signals of a sustained reversal. The existence of a three-bar bearish candlestick pattern centred with a hanging man at an area of previous support gives traders reason to believe that the S&P may be in for further declines. Coupled with the bullish outlook from the dollar, now that the Japanese Yen has surrendered its right to be considered a safe haven after yesterday’s antics, this view is reinforced by the confluence of several factors. The USD appears to have broken the back of its long term down-trend over the past week and this has been as a result of its superior liquidity and position as the only viable safe-haven in respect to the volatile Yen and overpriced gold.
Another interesting currency which has been a former darling of the bulls but now could experience considerable moves lower is the AUD. The twin problems of an increasingly risk-averse market, alongside today’s news that the Reserve bank of Australia has been forced to reduce interest rates, have caused the currency to head lower. The unsustainable 4.75% rate has been reduced to 4.5% on inflationary fears. The high yield that the Australian dollar has been able to provide to risk-hungry investors over the past year has made the fall of the AUD even more accentuated. As a highly correlated currency to the EUR it has also been negatively affected by the Eurozone problems despite being relatively isolated from these. The fact that these reversal signals have occurred at the end of the month would usually have more significance had it not been for the current prevailing market sentiment.