Aussie Dollar Gaps Higher

07/12/06 08:36:00 AM

by Arthur Hill

The Australian Dollar Index ended a picture-perfect correction with a gap that opens the door to higher prices in July.

Security: $XAD
Position: Buy

The Australian Dollar Index (XAD) surged from late March to early May and then embarked on a correction. This occurred with a nice orderly decline that retraced 62% of the prior advance. Corrections often extend to this key Fibonacci number, and the index reversed right near the 62% retracement mark at the end of June (Figure 1). In addition, the decline formed a falling wedge, typical for a correction.

FIGURE 1: AUSTRALIAN DOLLAR INDEX. The aussie embarked on a correction after a surge until early May, occurring with a decline that retraced 62% of the prior advance.

Graphic provided by: MetaStock.

Even though the correction looks great, the index still needed a catalyst to end the decline and signal a continuation of the prior advance. XAD firmed with a white candlestick on June 29 (gray oval) and then gapped higher the next day. The gap broke above the upper trendline, and this powerful move ended the correction with force. The gap has held for more than a week, and I consider it a bullish breakaway gap. A move back below 74 would be worrying and question bullish resolve. A decline below 73 would completely fill the gap and negate this bullish signal.

Momentum is also turning higher, as the moving average convergence/divergence (MACD) moves above its signal line and into positive territory for the first time since early June. A MACD signal line crossover called the April bottom well and lasted for six weeks. In addition, the bearish signal line crossover foreshadowed the correction and also lasted for six weeks. The current signal line crossover is less than two weeks old, and I would expect it to last until at least the end of July.

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 Gaps Higher

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