NZDUSD: A Word of Caution to Sellers

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Important: I use New York close charts so that each 24-hour period closes at 5 pm EST.

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Since closing below the 0.7160 area on April 23, the NZDUSD has lost 200 pips. And as I pointed out in the April 26 commentary, it was going to take a daily close below 0.7050/60 to expose the next key support at 0.6960.

The pair reached 0.6960 during yesterday’s session and is catching a slight bid so far today. I wouldn’t call this a turning point, at least not yet, but it is a bounce from a well-defined support level.

At the moment today’s bounce isn’t much of a challenge to sellers. NZDUSD bears are still in control, and there’s no evidence of a change in the controlling party.

However, there is a 4-hour pattern developing that could become a concern for sellers.

If we connect the April 27 high with the highs in early May, we get a short-term descending trend line. If we then join the May 1 low with the lows from the 8th and 9th (which was also a pin bar), we get a lower boundary to the one we just drew.

Although difficult to see, this is actually a narrowing pattern, also called a falling wedge. Even if it weren’t narrowing, a descending channel at the bottom of a 450 pip decline would still have bullish implications.

That isn’t to say I’m going to rush out and buy the NZDUSD. At a minimum, it’s going to take a close above the upper trend line on the 4-hour chart above to turn things slightly bullish.

Keep in mind too that we have an RBNZ rate decision today at 5 pm EST.

A study of the last two years of price action suggests that a bounce at current levels shouldn’t surprise anyone. While the pair isn’t quite at its range low, the New Zealand dollar has made a habit of carving these 400 to 600 pip swings.

In summary, shorts should tread carefully here, those interested in selling need to see 0.6960 break down on a daily closing basis, and prospective buyers need an upside break of the 4-hour falling wedge.

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