One week ago I pointed out a way to trade a possible change in direction in the EURNZD. The first chart in that commentary illustrates the first lower low since February of last year, a sign that buyers are tiring.
The second chart in last week’s post shows an ascending channel on the daily time frame. The idea was to wait for a close below channel support before considering a short entry.
Fast forward to today and the pair is still in consolidation mode. The February 5 high of 1.7100 is intact yet sellers haven’t been able to follow through on the lower low in January.
However, something significant occurred just a few hours ago. The EURNZD retested channel support near 1.6850 and immediately bounced higher by 140 pips.
To some that may not seem very important. After all, the market is still contained by channel support and resistance which means there’s nothing for us to do, at least not yet.
But trading price action is about studying the way a market reacts to various levels, not randomly buying and selling. Anyone can do the latter, but how many traders have the discipline to wait days or weeks before putting capital to work?
In that vein, today’s bounce from 1.6850 tells us that channel support is indeed significant. Thus a close below it would open up downside targets including 1.6140. In other words, the bid at 1.6850 helped to confirm the trade idea I first mentioned on February 7.
While my conviction to initiate a short below 1.6850 increased with today’s price action, it’s still paramount to wait for a close below channel support. This is especially true given the recent increase in volatility.
As I mentioned last Wednesday, a break below channel support would target 1.6140. I also think we could see a bid develop at the recent swing low at 1.6520 as well as the October 2017 low at 1.6363.