EUR/AUD – Double Bottom and a Trendline Breakout

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EUR/AUD - Double Bottom and a Trendline Breakout

The EUR/AUD has been bearish since a high in December at 1.5332, from which it has slid down to 1.40 by mid-January. Now it is finally stabilizing and perhaps even challenging the prevailing downtrend.

EUR/AUD 4H Chart 1/27
euraud 4h chart 1/27
(click to enlarge)

Bearish Trend Shifting: The 4H chart shows the EUR/AUD in a persistent downtrend. It has been holding under a falling trendline. Before the ECB meeting last week, the pair rallied and tested the 1.44 area, finding resistance from the trendline and eventually retreating after the ECV announced QE details.

Failed Bearish Continuation; Double Bottom: However, after a very brief crack at 1.40, price rebounded. As we get close to the end of the 1/27 session, EUR/AUD has come up back above 1.43, and back to the levels before the QE announcement. This full reversal of the euro-negative reaction suggests that the market may have priced in QE and that the Aussie is also very weak.

Bullish breakout; Projection: We can see that price is now breaking the falling trendline and about to from a double bottom off of 1.40. If price can break above 1.4410, there would be a bullish breakout. If we use the range of the double bottom (about 400 pips) to project a target to the upside, it would be around 1.48.

If there is a pullback, a hold above 1.42 would be a good sign that the double bottom is respected. Otherwise, it could be a false breakout, and the outlook would return to the downside.

EUR/AUD Daily Chart 1/27
euraud daily chart 1/27
(click to enlarge)

Rebounding from Oversold Condition: The EUR/AUD was just oversold in the daily chart, but price action has resolved that by consolidating since last week, and the RSI has come back above 30. Sometimes we say that the market can stay oversold in a bearish trend. In the daily chart, we can see that the trend is really sideways, with a downswing in the last month and a half. So, one outlook for a sideways market that is oversold is to anticipate a “reversion to the mean, and the moving averages can represent the mean, especially when they are sideways and clustered together.

Bullish Outlook: Still, if we do get a break above 1.44, maybe we should limit that bullish outlook due to the strength of the previous downswing.

There is a resistance pivot back in October, around 1.47. Below that,we can see 50% retracement at 1.4650. Also, note that the moving averages are clustered around 1.46. Perhaps a more viable bullish outlook pending a completed double bottom should be towards the 1.46-1.4650 area.

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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.