Evidence mounts to turn cautiously bullish AUD near term

Evidence mounts to turn cautiously bullish AUD near term

FXstreet.com (Barcelona) - While the miseries of the Australian Dollar have been well documented, with investors cashing in on what has been referred as the 'perfect storm' - China fears, RBA easing campaign and Septaper talk - the bearish tide appears to be turning, with not only mass psychology evidence, but technicals are also trying to tells us a new story.

We've come a long way since all began...

The AUD/USD was hit for a period of 3 calendar months with the type of downtrend any seller would only dream of, displaying down-waves one after another with counter trend players few and far between. The first noticeable technical feature of the trend being nicely controlled by sellers was the solid relationship built with the 20-day EMA, tested in two occasions through June trading, only for the sell-off to continue its course.

As we moved into July, higher buyer's participation became evident, as the volatility increased and so did the struggles to take prices further down, yet, the formidable 0.93 bearish stronghold was there to hold the bull's onslaught, "and down a bottomless hole we went again", which could have been the easily the thinking running through many discouraged bottom pickers' minds, just as calls for an acceleration of the downtrend towards 0.8860 were being met.

But as the saying goes, 'what is most obvious, might be obviously wrong'...

Once the desperation for a long-awaited reversal reached fresh highs - as the trend was meeting new multi-year lows -, an impressive 5-day winning streak manifested, taking a crowded short specs community on the wrong foot. That sequence of bullish candles has so far brought into the market a much larger number of committed buyers, starting to develop the idea that near-term price dynamics on the Aussie are pointing to higher ground.

As a first 'telling' signal, for the first time since the onset of the downtrend back in early May, the pair has been holding above the 20-day EMA for 4 days, making the existing relationship no longer valid. Secondly, an initial dip below 0.9080 key support earlier on Thursday was bought up in earnest, faking out sellers and suggesting growing interest to be 'dip-buyers'.

What is next for the Aussie?

Despite the constructive outlook for the Australian Dollar, there is still plenty of work still to be done, should buyers really mean to reverse the strong mid-term downtrend in place. First of all, the next target to conquer should be 0.9220, with an hourly candle close above it likely to lift buyer's confidence for a more ambitious target towards 0.93/0.9330. The latter is still expected to be protected fiercefully by macro/position traders, with some large stops probably lying above 0.9330/40.

If there is a successful resolution for the above bullish scenario, and the AUD/USD exchange rate makes it above 0.9330/40, that would represent the milestone many contrarians have been waiting for, opening up further upside scope towards the 0.95. On the flip side, if bears manage to regain the 0.9030/40, but especially the 0.90 handle, through hourly candle closes below, that would imply a return by selling forces, likely to threaten trend lows and beyond.

To summarize, if there has been a time to go long the AUD/USD over the past few months, this time looks as good as any. On top of that, if one throws into the mix fundamentals such as evidence of Japanese demand for the Australian Dollar, a pick up in Chinese indicators, RBA not so dovish near term or even with Fed taper endorsement for September increasing, it might not be a bad idea after all to have adopted a dip-buying strategy in this market for the time being.