Interesting Patterns Developing in AUD/JPY Currency Pair

08/20/2010 12:01 am EST

Focus: FOREX

On a four-hour chart, the AUD/JPY pair is stuck in a congestion pattern again. After a hitting 79.20 at the start of August, the pair developed a triangle pattern. Then the market brought the AUD/JPY down to 75.80 before entering what appears—so far—to be a triangle again.

Click to Enlarge

(On chart: Simple moving average (SMA) 50-period (red), 200-period (bold, gray), RSI-14 with simple moving average five-period of RSI attached)

If so, we are currently in wave d. Because of the negative reversal with the RSI—when the RSI high is higher, but the price high is lower—I believe there should be some further decline. Therefore, I believe wave d is not complete, and then wave e may follow to complete the triangle.

Overall, the momentum appears to be bearish, as the RSI dipped into the oversold area and has since not been able to rise above 60.

Interestingly, the market appears to be in a congestion pattern, possibly a triangle as well in the daily/weekly time frames.

The daily time frame below shows the market in congestion/consolidation. Using the highs and lows, it appears to be a triangle. However, there could be a channel as well. If volatility declines, the market is likely to stay in congestion. The ATR, which is not shown on this chart, has been steadily declining since the beginning of June.

Click to Enlarge

Currently, the market is in the middle of the congestion, however, it is coming off topping action and has bearish bias.

The RSI is showing bullish divergence, which was followed through by some bullish attempts. However, these attempts developed a negative reversal and suggest a target at X, which is near the 71.00 level. This projection, or at least direction, is reinforced by the completion of a Gartley retracement pattern. The market successfully broke below a minor rising support to complete this Gartley and give a bearish signal.

The short-term target is Y, which is near the 74.50 area and the 78.6% retracement level.

The weekly chart below also shows the market in a triangle. This triangle develops after a strong decline.

Click to Enlarge

The RSI has risen from the oversold area, but failed to break above 60 and sustain it in 2009. The RSI in 2010 has declined to 40, but is not breaking yet. There is a slight negative reversal signal, but since the RSI is still above 40, it is weak.

2010 also saw the pair hit the 200-period simple moving average (SMA) and plunge. The 200 SMA vs. 50 SMA orientation is still bearish, and the gap appears to have stopped narrowing. The SMA 50 has flattened from a positive slope.

It appears that all the time frames are lined up to be bearish, although the momentum is currently lacking. I will continue to track this pair, and if the triangle in the four-hour chart is complete, targets will be assessed.

By Fan Yang, currency analyst and commodity trading advisor (CTA),