Originally published by Guppytraders.com
The market contradiction with the Australian dollar persists. The Australian market is making new 10-year highs, although the index has stalled near resistance at 6300. New and persistent market highs are a sign of economic strength, although the Reserve Bank of Australia (RBA) continues with low interest rates whilst they wait for growth to pick up.
When the Australian dollar last fell dramatically from $0.94 to $0.69 in 2014-2016 it matched a fall in the Australian Index from 5976 to 4746. We are not currently seeing the same dramatic fall in the Australian dollar, but we are seeing a contradiction in market behaviour.
Here’s the contradiction– a falling Australian dollar and Australian market making new 10-year highs.
The Australian dollar broke the long term uptrend in April and quickly developed a substantial downtrend. It reached 12 month lows at $0.74 and now looks to be heading towards two year lows near $0.715. The RBA is celebrating because they have been aiming for a lower dollar as a matter of principle.
The last time the Australian market was trading near the current highs the Aussie was trading at $0.81 rather than heading for a low of $0.715. The last time the Australian dollar traded around $0.715 the Australian index was at a low near 4750 rather than a 10 year high near 6300..
When the Australian dollar uptrend line was broken near $0.765 it took less than 3 weeks to touch $0.74. This support level has been tough and the Australian dollar hovered around this level for the past eight weeks. A fall below $0.74 has a downside target near $0.715. This target is established using the support area tested in 2016 and 2017.
The trajectory of the Aussie dollar suggests this contradiction may be resolved with the Aussie market moving back into trend sync with the Aussie dollar. The prolonged, and to date, unsuccessful, testing of resistance nears 6300 suggests some trend weakness. However this is not supported by other trend indicators which show a sustainable uptrend.
The weakness in the Australian dollar started in 2018 January. The rebound strength in the US dollar didn’t start until 29018 April following a consolidation near $0.89. This four month ag suggests there is a weak relationship between Australian dollar weakness and US dollar strength.
The contradiction between Australian dollar weakness and Australian market strength is not easily resolved. Traders are alert for evidence of a pullback in the Australian market if the Aussie dollar fails to hold support near $0.74.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.