The Euro is parked at an interesting resistance level against the Aussie this morning and could be a sell set up if there is a correction in the recent risk off “Aussie” selling.
After relentless “risk off” selling throughout much of May, the task before investors and traders is now to assess how much risk premium is enough for the moment. At some stage markets will pause and await further developments given that:
- Although a default by Greece looms as a real possibility it is far from a certainty in the near term
- The contagion impacts of a default are a major concern but difficult to assess given that it is not clear how a default would actually be managed
A couple of events over the weekend have the potential to cause at least a short term breather. Firstly the G8 statement emphasising the need for growth is a reminder that the ultimate outcome of the current political process in Europe may yet be a positive in that it reduces the emphasis on austerity as a solution until economies recover.
Secondly, Premier Wen Jiabo’s statement giving “more priority to maintaining growth” foreshadows further monetary easing and efforts to stimulate the domestic economy in China.
As the first chart below shows, EUR: AUD has retested to the zone of resistance represented by the support line of a major triangle formation. It is also at the 200 day moving average (green line).
The 2nd chart below is also the daily but shows a zoomed in view of the latest rally which has taken the form of a 5 swing advance.
We have now arrived at a cluster of Fibonacci projections. These project that the swing up from “4” to “5” will be the same size as (100%) of the swing up to “1” and also 127% of the length of the correction from “3” back to “4”. There is also a 3rd projection around this level that I’ve left off the chart to cut down the clutter This projects that 4/5 will be 61.8% of the length of the whole advance up to “3”
A typical strategy here would be to sell if price rejects this level (or a little above it) by making a trend peak in the next couple of days. This creates the possibility that we will correct the whole 5 swing move with a potential initial target of a 50% retracement.