Aussie Dollar Index Firms With Divergence

01/11/06 07:44:45 AM

by Arthur Hill

The Australian Dollar Index declined throughout 2005 but finally reached support. Early strength in 2006 could lead to a trend reversal.

Security: $XAD
Position: Hold

On this weekly chart (Figure 1), the Australian Dollar Index ($XAD) surged to around 80 in March 2005 and then corrected to around 73 by November 2005. There are three reasons I think this is a correction. First, the decline returned to broken resistance around 73. This level turns into support. Second, the decline retraced around 62% of the prior advance. And third, the decline formed a falling wedge or price channel. The return to broken resistance, 62% retracement, and pattern are all typical for corrections. If it looks like a correction, walks like a correction, and talks like a correction, then...

FIGURE 1: AUSTRALIAN DOLLAR INDEX. $XAD surged to around 80 in early 2005 before going back up by the end of the year. Is this a trend reversal?

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

Now that I consider this a correction, it is time to identify the key level that will reverse the current downtrend. Yes, the trend is considered down as long as the upper trendline of the falling channel holds. In addition, the index established a reaction high at 76 in December 2005. To end the current downtrend (correction), the index needs to exceed the upper trendline and its December high. This would forge a higher high.

XAD is off to a good start in January and the moving average convergence/divergence (MACD) sports a positive divergence. The index ended the year on a weak note but quickly recovered in 2006 with a gap and a long white candlestick the first week of January 2006. This is positive, but the index remains short of an actual breakout. In addition, that MACD formed a small positive divergence. The prior two divergences helped identify trend changes in September 2004 and March 2005. The MACD moved above its signal line in January and the only thing missing is a break above 76 for the index.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Aussie Dollar Index Firms With Divergence

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