Capitulation. A market phenomenon that should be on every traders’ radar.

This market dyanamic has many different expressions, but the underlying principle remains. A market direction is widely accepted as inevitable. It is the consensus trade. The market fails to move in the “right” direction, and then moves the other way, catching out all those holding the position. It is only when the most stubborn of these traders finally relents, and capitulates into closing their position, that the market can then move in the original direction.

Since mid 2015 the consensus trade in AUD/USD is short the pair. Sell rallies. Despite an interest rate differential in favour of buying, the long slide in commodity prices, and the consequent decline in Australia’s terms of trade, meant the AUD “must fall”. Targets generally started with a 6, and many were expecting a drop to somewhere between 0.7200 and 0.6600.

Instead, AUD/USD repeatedly rejected levels below 0.7000, and held around 0.7200 for an extended period. Then it started testing higher levels, as the daily chart shows. These rallies severely tested the bears. In my view capitulation has occurred. This week, a number of influential analysts revised their “fair value” for AUD/USD up from 0.7200 to 0.7700. *sound of bell ringing*

The USD index (DXY) may be setting for a test of 13 year highs, just 2% above current levels. The strength in USD is likely to continue while markets believe the US government elect is good for business, and therefore the local and global economy.

Even better, the chart offers a set up that corresponds to this view. The pair is approaching a channel bottom that co-incides with a minor support. The MACD is crossing, above the zero line. I’m a seller at 0.7553, with a stop loss at 0.7585. I’ll be watching closely if the pair approaches 0.7400-0.7450, but the ultimate target is 0.7175.

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