During yesterday’s session, I commented on how I believe the Australian dollar could outpace its New Zealand counterpart going forward. While not yet confirmed, the inverse head and shoulders pattern below certainly hints at a relatively stronger Aussie.
I mentioned this formation ahead of the last RBNZ which was preceded by the U.S. elections. The ensuing volatility was severe, but the structural integrity of the pattern is intact.
However, as nice as things look right now, this pattern is far from confirmed. So with no rush to get in, it’s an excellent time to review what’s needed before we should consider an entry.
Four critical elements make an inverse head and shoulders tradable…
- The formation must occur after an extended move lower
- The left and right shoulders must overlap (same horizontal plane)
- Neither shoulder can extend below the head
- Price must break the neckline with a daily close
So far, the AUDNZD has completed the first two. What we don’t know yet is whether the right shoulder will extend below the head at 1.0236.
We also haven’t seen the pair close above the neckline at 1.0765. Considering we’re 230 pips away from this area, chances are it’ll be some time before prices extend that high.
However, as long as the U.S. election low at 1.0363 holds, I’ll continue to view this as a potential bullish reversal. But we’ll need to see a daily close above 1.0765 for it to become a legitimate opportunity.
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