By Stoyan Bojinov
Wall Street continued its decline into Wednesday as investors took profits in nearly every asset class, with U.S. treasuries being one of the few gainers during the day. Investors also digested the most recent ADP employment report which showed that fewer than expected private-sector jobs were added in April, leading to further questions about the economic recovery. Meanwhile, crude oil futures have been wild lately, slipping lower in the past few days with prices dipping to below $109 a barrel. Gold and silver are continuing to sell off as well, with silver posting a historic two-day decline as the CME Group hiked margin requirements for a third time in two weeks. Broad weakness in global equity markets translated into weaker soft commodities as well, with cotton and lumber taking big dives lower and shedding well over 5% in just a few days.
Following its latest meeting on May 3rd, the Reserve Bank of Australia held interest rates steady at 4.75% as analysts had anticipated. The AUD quickly retreated lower in the currency markets and has since slumped in the days following, perhaps hinting at a long overdue correction given the magnitude of its increase in the last month. The Rydex CurrencyShares Australian Dollar Trust (NYSEARCA:FXA), which tracks the Aussie dollar versus the U.S. dollar, has been charging higher since mid-March, and the fund recently hit an all-time high of $110.18 a share. However, since the start of this trading week, FXA has dipped lower by two full percentage points, signaling that further declines are to be expected if support does not hold above the $107.50 level in the coming days.
Consider the daily chart for FXA below. Notice how the fund struggled during the final months of 2010 to break out past the $103 level. However, in the final trading days of May the fund was able to charge higher and finally close above $103 a share. In the month of April alone FXA has returned close to 6%, and the fund’s recent pause at the $110 level is anything but a surprise given its robust performance thus far.
Click to enlarge
If we conservatively assume that FXA is due for a pullback then we can utilize Fibonacci retracements to help us predict likely levels that the fund may retrace down to. The retracement in this case extends from the recent trend low on March 16th to the high of $110.18 a share set on April 29th. If FXA deviates from its currently strong uptrend it will likely fall lower to the 38.2% level, just above $105 a share. The fund’s 200 days simple moving average (yellow line) is rising, which suggests that a longer-term uptrend is in tact, but keep in mind that recent selling action could prompt more profit taking, which would lead to an even sharper decline for FXA.
The Aussie dollar is technically poised to climb higher in the coming months, however its recent run-up is also a sign of caution that traders may soon look to take profits, which could lead to a quick tumble in share price. If FXA closes below $107.50 a share in the coming days then the fund is likely headed even lower, declining to anywhere from $105-$102.50 a share. Likewise, if FXA holds support above current levels then the fund’s next level of upside resistance comes in at the previous high of $110 a share.
As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: No position.
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