AUD/USD Forming a Head and Shoulders Continuation Pattern

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AUD/USD Forming a Head and Shoulders Continuation Pattern

AUD/USD has been consolidating October after falling to a new low on the year at 0.8642. The choppiness really started in late September, and in October, there was a strong bullish correction rally to almost 0.89. The ability to break above the previous resistance pivot at 0.8827 opened up a bullish scenario. However, price failed to hold up and fell back toward the low on the year.

Last week we saw price hold above the 0.8642 low, and returned to 0.88 this week. If price pushes above 0.89 by the end of the week, we would have a double bottom scenario, which would first open up the support/resistance pivot at 0.90, then toward the support/resistance area around 0.91.

AUD/USD 4H Chart 10/14
audusd 4h chart 10/14

(click to enlarge)

Head and Shoulders Continuation Pattern:
However, today’s (10/14) price action is challenging this scenario. If price fails to clear 0.8826 and falls back toward the 0.8642 low, it would be forming a head and shoulders pattern. Students of charts patterns learn about H&S patterns as possible signs of topping, and thus bearish correction or reversal. However, when it is spotted in the middle of a strong downtrend, as is the case currently with the AUD/USD, the H&S pattern signals bearish continuation.

The main signal is from the inability to extend the rally from 0.8642 to 0.89. That rally is a “clear-out” that may have taken out some weaker bears in this market. However, this market continues to look bearish as the “clear-out” rally was essentially completely reversed. Another bullish attempt that holds below the 0.89 level, preferably around the same high as the previous “shoulder” shows that bulls are losing the fight.

AUD/USD Weekly Chart 
audusdweekly10142014

(click to enlarge)

Downside Risk
A bearish continuation scenario has very significant implications. From the weekly chart we can see that price has been bearish since 2011, choppy, but bearish. The decline is being held up as AUD/USD cracks the previous 2014-low made in January, and as the weekly RSI shows oversold conditions.

If the market fails to form the double and the head and shoulders scenario materializes, there is further downside to the support pivots in 2010, at 0.8315 then the 2010 low at 0.8066.

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.