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The Australian Dollar's Road Lower Against the Euro Could be About to End

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The Euro-to-Australian Dollar exchange rate might be peaking suggests new analysis. 

If I throw a snowball at someone, it is going at its fastest at some point between when it leaves my hand and when it misses their head - probably earlier rather than later in the arc.

In momentum terms, the peak occurs when the rate of speeding up is at its greatest - i.e. momentum is the rate of change, not the actual speed.

Momentum is a key concept in financial markets because it can provide an early warning of underlying weakness, as it usually peaks before the asset in question.

Sharp bearish momentum is also a necessary pre-requisite for the start of a successful downtrend.

When several different momentum indicators are in agreement, i.e. all pointing in the same direction, they tend to reinforce each other and strengthen the overall signal.

It is these two final characteristics of momentum which are highlighted in the chart of EUR/AUD (below), and are signalling the probable start of a deep decline, at least according to analyst Richard Perry at Hantec Markets.  

"Calling the top in any market can be a risky game," says Perry about EUR/AUD," however when the momentum indicators all begin to align to say the same thing the potential for success increases."

EUR/AUD peaking

It is not just momentum which is signaling more downside but also what Perry calls a "bearish outside day" which has formed at Friday's highs and is also a negative indicator for the pair.

A bearish outside day occurs at the end of an extended uptrend when prices make a new high and then roll over and close below the close of the previous day.  

The important thing is normally that the body of the outside day - which is the space between the open and the close - completely engulfs the previous day's body, as in the example below.

Signs of reversal in EURAUD

A further negative sign is that the pair has formed three down-days in a row if Tuesday closes lower than it opened, as looks likely, and this is a negative indicator for the chart.

On the hourly chart, "the market is now trading below a clutch of falling moving averages and, "intraday rallies are now a chance to sell." Says Perry.

According to Perry support is situated at 1.5505 first, and then 1.5455 - the first key reaction low.

Demark Showing a High

The technical term 'TD perfected' describes a signal of exhaustion using an indicator called the Demark Sequential indicator, and it is often seen as a reliable sign of trend exhaustion. 

The EUR/AUD weekly chart is currently showing the uptrend is exhausted after flashing a TD perfected according to Commerzbank Head of Technical Analysis Karen Jones.

"EUR/AUD – divergence of the daily RSI + a TD perfected set up on the weekly point to slippage back to the 1.5160 2017 uptrend," she says.

Commerzbank analysis

Peak and Trough Progression

Although we agree that there are compelling signs of the beginning of a sell-off, especially in the posting of an 'outside day' at the highs, the TD perfected and the simultaneous corroboration of all three momentum studies together, we still note that the downtrend remains very young.

Peak-and-trough analysis is another indicator used by technical analysts to measure reversals in the trend, and it has yet to signal a reversal from up to down on any of the important timeframes.

The four-hour would be the first to indicate a reversal by showing two lower highs and lows but we would argue that it has only shown one so far.

We would ideally wish to see a break below 1.5494 lows to signal a reversal of peaks and troughs on the four-hour chart and the start of a new short-term downtrend, with an initial target at 1.5455, Perry's "key reaction low" support level. 

EURAUD peak and trough

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