AUD/USD Technical Outlook Mired By Head-And-Shoulders Formation

With that said, the decline from the February high (0.8007) may turn out to be a change in market behavior rather than a correction in the broader trend amid the flip in retail sentiment, and the failure to defend the February low (0.7564) casts a bearish outlook for the exchange rate as a head-and-shoulders formation takes shape.


Image of AUD/USD rate daily chart

Source: Trading View

  • Keep in mind, the AUD/USD correction from the September high (0.7414) proved to be an exhaustion in the bullish trend rather than a change in behavior as the exchange rate traded to fresh yearly highs throughout December.
  • At the same time, developments in the Relative Strength Index (RSI)showed the bullish momentum gathering pace as the indicator pushed into overbought territory for the first time since September, with the break above 70 accompanied by a further appreciation in AUD/USD like the behavior seen in the first half of 2020.
  • However, a textbook RSI sell signal emerged following the failed attempt to test the March 2018 high (0.7916), with AUD/USD trading to fresh 2021 lows in February as it failed to preserve the January range.
  • Nevertheless, the pullback from the January high (0.7820) turned out to be a short lived, with AUD/USD trading to fresh yearly highs to negate the scope for a double-top formation.
  • As a result, the decline from the February high (0.8007) may also be another exhaustion in the broader trend, but failure to defend the February low (0.7564) casts a bearish outlook for AUD/USD as a head-and-shoulders formation takes shape, with the RSI highlighting a similar dynamic as it tracks the downward trend from earlier this month.
  • Need a break/close below the neckline around 0.7560 (50% expansion) to 0.7570 (78.6% retracement) to bring the downside targets on the radar, with the first area of interest coming in around 0.7440 (23.6% expansion) followed by the 0.7370 (38.2% expansion) area, which lines up with the 200-Day SMA (0.7373).
  • A measured move of the head-and-shoulders formation brings the 0.7180 (61.8% retracement) area within the scope of the key reversal, with the next region of interest coming in around 0.7130 (61.8% retracement) to 0.7140 (23.6% expansion).
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