ASX pauses below 6k as AUD treads water pre-Fed

Data this week has remained a net positive for the Australian economy and the RBA. Technically ASX could be preparing for a pullback below 6k whilst AUD ponders a break of a bullish wedge.

The Service Index expanded at 53 in April, up from 51.7 in March. This complements the soaring read from the manufacturing sector which hit its second highest level since March 2003.

• Four of the five activity sub-indexes in the Australian PSI indicated growth in April (seasonally adjusted)
• Sales rose to 55.0 points
• New orders improved to 54.5 points
• Employment continued to grow (but at a slower rate than the previous month, at 51.9 points)
• Supplier deliveries moved into growth (53.1 points) from contraction.

The combined read for manufacturing and services now sits at 56.1 and is trending nicely higher to bring inflationary pressures to the RBA. Earlier this week they held at 1.5% and removed any immediate concerns over employment, which had been put onto the last paragraph of their March minutes of the meeting.

The upside rally has almost perfectly tested the 100% projection, and fallen shy of the 6k milestone once more. As 6017.5 markets the 2015 high, 5966-6017.50 could mark the zone which triggers a sell-off if one were to occur.
 
The rally to this point has been decent and the moving averages remain in the ideal bullish sequence, yet as the rally is fast approaching the cluster of milestone resistance levels, then a retracement could be on the cards at the very least.
 
We have outlined a potential bearish wedge but we confess this is very early stages. The highest close since 2015 was achieved last week at 5918, so a close beneath here this week will provide another Doji or Shooting Star candle of some sort. Whilst these do not themselves generate sell signals in our view, taken in context of the resistance and other hesitant candles of recent week, it adds to the argument of a pending correction.

The session is yet to close but we will assume it will not be a pretty candle. Even if we are to see a quick recovery over the next hour, the candle is still volatile and warns to nervousness at the highs. As it stands we are on track to confirm an evening star reversal with a bearish Marabuzo candle.
 
Such candles tend not to generate ideal entry points by simply scaling your risk to the candle, but we can consider using a sell-limit order within the daily range to improves potential reward to risk ratio. As this is counter trend we would typically expect a lower reward to risk, yet the plethora of resistance levels overhead increase the probability of the trade in our view. Alternatively, if you are looking at long positions, you could use price action on D1 as a deterrent until you believe the correction is over.

AUDUSD trades water as we approach the Fed meeting overnight. In today’s video, we outlined why it was not our favoured trade around the event, but looking beyond it we suggest you can an eye on the potential bullish wedge. As AUD treads water and remains within the bullish wedge, then a hawkish comment should send it lower within the wedge, yet we doubt it can break the downside.
 
For us, we are more interested in an upside break as it could pave the way for a move towards 076-0.7615 resistance zone. As today’s candle is relatively small, if the Fed are to turn dovish and dispel any belief of a June hike, then the upside could have more potential than the downside might, if the Fed are hawkish.

Matt Simpson | Senior Market Analyst

A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.