AUD/USD Trading In A Broadening Pattern

AUD/USD (daily chart as of August 9, 2013) broke down on July 30 below a short-term uptrend line connecting the July 12 low and the July 25 low, which invalidated a possible “inverse head and shoulders” pattern. Price then fell down to a low of 0.8850 on August 5 and formed a “hammer,” which was confirmed by the following three trading sessions with all bullish candlesticks. Price action has now become more complicated, as expected.

We have several pattern transformations since late June, including a falling wedge and a possible inverse head and shoulders, and the pair is currently making yet another transformation – a possible broadening pattern (bold lines on the chart). Watch the significance of the resistance line connecting the June 26 high and the July 24 high, which is the upper boundary of the broadening pattern and also the neckline of the failed inverse head and shoulders pattern. Note also that the lower boundary of the broadening pattern is also the lower boundary of the previous falling wedge pattern. The hammer formed right at the lower boundary line, which is a possible bullish reversal signal.

Watch also the daily EMA 20 line. The pair needs to stay above that line to get more upside momentum, as the line has been acting as strong resistance for about four months. Price may range-trade in the broadening pattern before a final breakout. The daily MACD had a bearish crossover below zero on July 31. It is making a second bullish divergence, the first one occurring between late May and early July. For the daily RSI, we had a line 2 false breakdown on July 30 while price broke below the short-term trend line. The RSI has turned up again above line 2 and is now rising towards 50 and approaching line 1.