Investors around the world have increased risk exposure in recent days following ECB President Mario Draghi’s indication that lowering Spanish bond yields fell within the ECB's mandate.
Markets are now parked at around Monday’s levels waiting to assess details of what the ECB intends to do in support of this.
Thursday’s ECB meeting may be a critical event in shaping investor risk appetite and Australian markets are sitting at technical resistance levels as they position for this.
The possibility of Spain or Italy defaulting on their sovereign debt lies at the heart of the Euro crisis. Bond yields are the single most important financial indicator of the potential for this to happen.
Markets will be looking for the announcement following Thursday's ECB meeting to provide evidence that ECB can keep Spain's long term bond yields under 6% in the short term and that achievable steps will be taken for the Euro support fund to assist in the longer term. This type of outcome is likely to justify further "risk on" buying.
Of course, a dissapointing outcome may see last week's gains unwound and more.
My first chart is the Aussie Dollar daily. As you can see, price is currently parked just under resistance at the top of a trend channel. This has been in place since mid June. The 78.6% retracement of the move down from the peak in February will also soon intersect with the top of this channel
The weekly chart below shows a longer term perspective. It shows the Aussie to be inside a larger triangle formation that dates back to the all time high in July last year.
The recent steep rally has pushed the fast stochastic on the weekly chart well up in to the overbought zone.
On that basis, the Aussie Dollar may be a candidate for short positions in the event disappointing news this week. That could see the trend channel resistance on the daily chart respected leaving the recent rally as a partial pullback into the body of the big triangle. This leaves the possibility of a decline that could ultimately extend below the triangle support on the weekly chart.
Turning to the daily chart of the Australian index, it is currently parked at the 61.8% retracement level of the last major decline. This coincides with a zone of support just above the lows of March/April this year.
Looking at the weekly below, we can see that like the currency, the index is also within a larger ranging formation, in this case a rectangle.
However, unlike the Aussie Dollar, the fast stochastic, on the index is trending up strongly but still in mid range with a fair bit of upside before it becomes overbought.
Based on that logic, the index may be the better market to buy in the event of good news. A break above current resistance on the daily chart could set up for a rally towards the weekly rectangle resistance at around 4500.