Last week I wrote about the Australian dollar becoming weak after the interest rate rise announced by the Reserve Bank of Australia (RBA). The currency did not behave as I expected it to. The setup that we were waiting for did not eventuate and the currency rallied.
The sellers were not ready to take this currency lower. There was still demand for the currency. The Wyckoff method tells us that areas of ultra-high volume will more often than not will get tested, and this is what is happening currently. The Australian dollar has rallied above our trigger point and you can see how the pricing action respects this area. Our trigger point is the low of the ultra-high volume bar as we are looking to go short. As the price breaks below our trigger point, we see signs of strength. When we rally above the trigger point, we see signs of weakness.
Australian Dollar Overbought
The move back above the trigger point has been in an upward trend channel and we can clearly see the areas where the currency is overbought. In the first overbought area, we see the price action is moving sideways with the attempt to push prices higher.
In the price chart above, at point A, we see an attempt to rally. There is a widespread up bar on very high volume which closes off the highs. The next bar continues the push higher but it’s on decreased volume. On both of these bars, we see signs of weakness, “Supply Coming In” and “No Demand”. Even though these principles were not confirmed, it shows that there is no professional interest in driving the currency higher.
The currency moves sideways and with any attempt to push prices higher we can see that the volume decreases bar by bar. On the lowest volume in that trading range, we also see a test which is basically the lowest volume on the chart. Any test like that on that sort of volume in an uptrend would usually mean higher prices. The next bar attempts to rally but closes on the low. This is bearish and professional money is not going to send this currency higher.
The currency drops toward the lower end of the channel and we see a sign of strength, “Strength Coming In”, which drives the currency back up to the top of the trend channel. Point B on the chart we see a major sign of weakness, “Upthrust” on ultra-high volume which sends the price back down to the lower end of the trend channel. We can see on any swing high the volume tapers off and also signals weakness.
Another Attempt of Higher Prices Fails
The chart above shows the continuation of the movement of the Australian dollar. After we see a sign of strength at the lower end of the channel, the currency rallies to point A. The volume significantly increases and a VSA principle appears as “Possible Hidden Selling”. The next bar confirms the weakness which shows that professional money is distributed at this level. The price drops slightly and then pushes higher. Once again we see the price of price on decreasing volume. Then a significant burst in volume appears as the price attempts to break the upper trend channel at point B. These two bars show significant weakness with “Supply Coming In” followed by “No Demand”.
The supply bar is very weak as it’s widespread and the price closes toward the lows. The no-demand bar shows an attempt to push prices higher, but that closes on the low. A magnificent drop in price occurs and the currency drops back down to the lower end of the trend channel. Again we see strength entering with climatic action which causes the currency to rise slightly. The currency then becomes a bit volatile with widespread bars and once again drops toward the lows.
What May Happen This Week
The currency is now at a critical point. Are we going to see strength enter the currency and cause it to rally? We can see as the currency has dropped towards the lower end of the channel, it has decreased volume. Price could this weak rally back up to the upper trend channel, but for weakness to enter this currency, the rally should be on much lower volume than we previously saw.
If the currency is to drop below our trigger point, this would be on significant volume to pass this area of support. If this occurs, we’ll wait for signs of weakness below the trigger point to confirm the weakness.
News to watch out for this week for the Australian dollar is the interest rate decision on Tuesday. It has been forecasted that the RBA to raise interest rates by 25 basis points to 3.85%. With the CPI figures last week dropping to 6.8%, the RBA may just keep the interest rates on hold.