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I’m going to begin the day today on the New Zealand dollar versus the US Dollar [NZDUSD]. Starting here, on the Daily Chart, over the past several days, we’ve been studying this reversal pattern at the top of the trend. First off, starting all the way down here into the 0.7700, we began an uptrend that continued as it pushed all the way up here into the 0.8500s at the top of the chart and into this pink-shaded area.
Well, during that uptrend, we created a high here on the left-hand side, signified by this black X on the left-hand side of the highest high. Then we made a little bit of a dip, a new high that challenged all the way into the mid-0.8500s, creating the highest high of the trend. Then the market started coming back down, settled out into a low, matching the previous low in this yellow-shaded area into the 0.8200s, made a little bit of a rally, challenging back into this green-shaded area, and that matches up with that previous left-hand high. And so, we began looking at this as a head and shoulders reversal pattern.
Then it came down, challenged here into the yellow zone, once again, significant support found here into the yellow-shaded area over the past several attempts into the low-0.8200-level. Once again, we see a rally coming back up just underneath that green-shaded area and into the right-hand shoulder of the head and shoulders pattern that we began studying. Now, the question, of course, is: what’s going to happen here? Are we going to continue to look for reversal from this zone or is it eventually going to breakout above here and continue higher?
Well, we don’t know that. So, what we have to do is make some broad, general assumptions that the market will continue to find resistance here. And as long as it does, we look for selling opportunities on rallies into resistance. As long as it stays under this green-shaded area, the shoulder level of the head and shoulders pattern, I’m looking for selling opportunities into resistance, looking for it, once again, to try and challenge again down to the neck-level of the head and shoulders pattern, or this yellow-shaded area. And once again, a breakdown underneath there, we look for the continuation of the downtrend.
So, selling on rallies into resistance into the blue-shaded area or even the green-shaded area become our main focus. And all of that will, of course, change and invalidate the pattern if we see a break above the green zone. 0.8415 to 0.8435, we look for it to continue to pressure back towards the highest highs, into the pink-shaded area. I’ve also placed a red trend line connecting those last three highs where those black X’s are, just to give us a further clue of potential resistance there and watching for clues to reversal from this zone.
Going along that yellow-shaded area, first off, let’s go back here in time. Left-hand side of the chart, along the yellow-shaded area, we saw support here and support here. So, two times finding support and, really, multiple times because this is the Daily Chart. Multiple times finding support into that yellow zone. How, of course, did we know it broke down through there and how, of course, would we know that it wasn’t just going to bounce off of it and continue to pressure higher? And I’ve highlighted this with this orange circle over here on the left-hand side. Once the market opened and closed, clearly broke underneath that yellow-shaded area inside this orange circle, that’s when we had confidence it was going to continue to pressure lower.
So, this very same price action that we see here in this orange circle is what we’ll look for over here on the right-hand side. If and when we see a clear open and close underneath that yellow-shaded area, underneath these last supports, and the neck-level of the head and shoulders pattern, we look for the continuation lower for the NZDUSD. So, right now, as long as it holds under the resistance, we’re looking for sells on rallies into resistance. We’ll look for the breakdown of support and the continuation lower. Now, it doesn’t have to break here. We could find support here again and bounce back up. But for the time being, I’m concentrating on the sell side, looking for the breakdown underneath there.
Further clue to that bearish price action of course would be the Forex Black Book trend bar. It is red. That gives us our trend bias. That’s the direction that we would tend to focus on currently for this currency pair. It is dark red, which means the shorter and longer-terms are in disagreement. Our preference of course would be that it turns bright red, telling us that the shorter and longer-term trends are in agreement to go down. As it starts to push down towards this yellow-shaded area, we will expect it over time to turn bright red again.
Let’s take all of that information down to the 4-Hour Chart. And of course, here is that blue-shaded area and the green-shaded area, and the red trend line representing the shoulder-level of the head and shoulders pattern. And again, as long as it stays underneath there, I’m focusing my efforts on the sell side for this currency pair. If you sold it yesterday, at any point, on challenges to the top side of this blue-shaded area, into the 0.8360s, you’re now sitting with profit, as it pushes down into the 0.8320s. Your main goal for the day today is that it breaks down through this 0.8320-level. Obviously, last time we were here, we found support. But if you follow it back to the left-hand side of the chart, the blue-shaded area, you can also see resistance over here on the left-hand side.
At what point did we know it was going to break higher? When it opened and closed and broke above that blue-shaded area. So, that is just the opposite of what we’re looking for now. We want to see the open and close underneath this 0.8320 and underneath the blue-shaded area. Let’s go ahead and put an arrow right here. So, open and close underneath here gives us confidence it’s going to push back down here towards the 0.8270s, 0.8250s, the purple-shaded area. And of course, underneath there, we challenge the yellow zone, which is our major support and a break underneath there, a continuation of the downtrend.
Now, of course, if you’re looking for a buying opportunity with this currency pair, buying into resistance, the blue-shaded area isn’t really the main focus here. You would want it to go all the way down here to the yellow zone before you would even consider buying it, because it minimizes your risk for any buys that you might take. So, what I would be looking for today are sells on rallies into resistance, even a challenge of the of the green zone may be something to watch for. A break of support – 0.8320 – we look for it to go down into 0.8270s and 0.8250s – the purple zone. Beyond there, back into the yellow zone or lower.
We do have a red arrow with the Forex Black Book direction. That gives us some confidence that we’re looking for the momentum to shift in that direction. Of course, another red arrow or another yellow arrow pushing in that direction would also give us some confidence, but right now, I think the main point that we’re looking for is the next clue that we’ll look for, for continuation lower is that open and close – clear break – of 0.8320 today. Looks for the next push in the direction of our reversal to go down for the NZDUSD today.
