FxWirePro: AUD/USD short setup upon bears’ more traction on head and shoulder pattern in minor trend, double top on major trend

Technical chart and candlestick patterns: AUDUSD’s recent upswings are exhausted at 21-DMAs and 7-EMAs, minor downtrend has formed head and shoulder pattern, with the head at 0.7295, shoulder 1 at 0.7235 and shoulder 2 at 0.7206 levels (refer daily plotting). 

The trend, for now, is extending head & shoulder pattern, the current prices go well below DMAs back again, all technical indicators are still in bearish favor. Bears are most likely to extend downswings up to next support at 0.7057 levels.

In addition to that, this bearish pattern is coupled with a broader perspective: The major trend of this pair has been extending double top formation with breach below neckline and may head towards 1 and a half year lows (refer monthly plotting), bearish engulfing candle followed by shooting star patterns plummet prices well below 7EMA again on this timeframe. Attempts of upswings are restrained below 21-EMA levels.

Both RSI and stochastic curves have signaled intensified bearish momentum as both the leading oscillators show downward convergence with the price dips.

While bearish MACD and EMA crossovers substantiate the above sentiments and indicate downtrend to prolong further.

Trade tips: On trading perspective, at spot reference: 0.7076 levels, capitalizing abrupt upswings, it is advisable to execute tunnel spread strategy with upper striking options at 0.7093 and lower short lower strikes at 0.7057 levels, thereby, one can achieve reasonable risk-reward. The strategy is likely to fetch leveraged yields as long as underlying spot FX keeps dipping but remains well above lower strikes on the expiration.

Alternatively, on hedging grounds ahead of Fed’s monetary policy and Aussie unemployment data, we advocate shorting futures contracts of mid-month tenors as the underlying spot FX likely to target southwards below 0.70 levels in the medium run. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards -68 levels (which is bearish), while hourly USD spot index was at 30 (mildly bullish) while articulating (at 05:56 GMT). These indices are also conducive for the above short set-up.

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex