Chart 1: Aussie dollar is extremely oversold and could rebound for a while
In my previous post I discussed how there is now a potential for the US Dollar Index to reverse from a powerful uptrend. Furthermore, last week I discussed how oversold the Australian dollar and Australian stocks were, when priced against the US dollar. Interestingly, yesterday we saw a strong bullish reversal in the Aussie dollar, just as the RBA announced a new rate cut. To me, this most likely indicates that the majority of the bad news has been discounted, as the Aussie has been falling since August of 2014. It seems to be a perfect contrarian set-up and the currency is most likely ready for a rebound and a short squeeze (refer to Chart 2).
Chart 2: Hedge funds and other speculators continue to press the short side!
Despite the coming rebound, which could take the currency back into the .80 handle, I will remain short the Aussie dollar. I believe that there is more downside to come, after this rebound plays out. Regular readers will remember that my initial AUD short position was taken in November 2012, around $1.05. My second position was executed in August 2014, just below $0.94.
Having said all that, Aussie stocks (via iShares MSCI Australia Index (ARCA:EWA)) look good for a trade. As discussed last week, sentiment on the Australian stock market was in extreme negative territory, while the price itself was sitting on an important support level. Therefore, in anticipation of a breakout during last night's US market trade, I decided to enter long positions just below $22.50. This morning showed a very powerful breakout candle. My risk management is very tight, with a stop loss being moved to my entry level now.
Chart 3: I bought some Australian shares priced in USD, with a tight stop
