On Thursday of last week, we discussed the NZDUSD and how the recent rally was in jeopardy below 0.7240. And although the level didn’t hold up quite as well as we would have liked, the area between 0.7240 and 0.7270 has no doubt attracted an influx of offers.
The bearish pin bar that formed yesterday is an example of the 0.7270 resistance area at work. In fact, yesterday’s high reached a trend line that I pointed out last week.
The level that extends from the April 2015 high has capped several advances including last Wednesday’s pre-FOMC surge.
Now, if we isolate the 48 hours of price action between Friday and Monday, we have a bearish inside bar pin bar combination.
It has all of the characteristics. We have Friday’s inside bar which represents consolidation followed by Monday’s bearish pin bar which formed as a result of trend line resistance just below the 0.7300 handle.
Last but certainly not least, all of the above occurred after an extended move up. The velocity of the 500 pip rally that began following the May 11th low is on par with the move that started on December 3rd of last year.
That particular bull move unraveled quite aggressively after reaching a high of 0.7375 on February 7th. The total damage was 485 pips over 22 trading days which nearly erased the entire 500 pip rally.
But as we know, past performance is not always indicative of future results. Though I would argue the study of a market’s past performance is more helpful than most may realize, particularly a range bound market like that of the NZDUSD.
I’ve entered short at 0.7260. This is the 50% retracement of Monday’s bearish pin bar and very near Friday’s high of 0.7258. My final target is the 0.6970 area which lines up with the trend line that extends from the 2015 low.
For those who aren’t already short, it may be prudent to wait for a daily close below the 0.7200 area before considering an entry. Key support below that comes in at 0.7125 followed by 0.7055. Alternatively, a daily close above 0.7300 would negate the bearish outlook.
Keep in mind that Wednesday features the RBNZ rate decision and statement at 5 pm EST. These events always promise an increase in volatility, especially with liquidity thinning out around the New York close.
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