EURNZD formed a bearish pin bar on May 10th that went on to trigger an 1,800 pip landslide over the next two months. However, recent developments – namely the mid-July bounce from multi-year lows – hint at the idea that higher prices are on the horizon.
You may recall a lesson of mine that explains the concept of impulsive and corrective moves. It’s a simple way to gauge the momentum in any market and also identify potential turning points.
Concerning EURNZD, all of the bullish moves between May 10th and July 8th were corrective. That is they fit neatly within the steep downtrend that had developed during the period.
However, the price action since that time appears to have taken on a different role. The angle and size of the mid-July rally have characteristics of a bullish impulse compared to the previous two-month decline.
But spotting what appears to be the first impulsive bullish move at a potential swing low is hardly enough to justify risking capital to find out if I’m correct.
This is where the study of price action really shines.
If the July bounce is truly a bottoming pattern and if the subsequent rally is indeed impulsive, we should also see a higher low begin to form.
So far we have the makings of one at 1.5450, but again, it isn’t enough to justify an entry. Instead, we can look to the consolidation pattern that has formed since the July 21st high at 1.5836.
If 1.5450 is going to serve as the launching pad for a higher low, the pair needs to break free from this descending channel.
After all, it can only be considered a higher low if it’s followed by a higher high, which would need to take out the previously mentioned 1.5836 handle. A close above that would target the measured objective at 1.6160.
One event that could provide the answer we seek is next week’s Reserve Bank of New Zealand rate decision. Many are expecting the central bank to cut interest rates at the Wednesday meeting (5 pm EST) which would likely result in a weaker NZD and give credence to the EURNZD bullish contention.
But as always, I will look to the technicals to tell the story rather than attempting to guess what the central bank will do or more importantly, how the market will respond.
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