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The NZDUSD is attempting to put in a bottom at 0.6820. It’s an area I mentioned on November 9 after the pair had reached the confluence of resistance at 0.6985.
Since retesting 0.6820 support on November 17, the pair has gone nowhere fast. The market is still consolidating after falling 770 pips between late July and mid-November.
Several traders have asked me whether or not I believe the recent price action to be an inverse head and shoulders pattern.
While it could signal a coming push higher, I wouldn’t label it as such. Over the years I have found that the best head and shoulders formations take months to form.
The side effect of an extended formation period is more space between the shoulders and the head. Look no further than the NZDJPY head and shoulders from 2015 or the massive 1,700 pip formation on the GBPJPY.
Not all head and shoulders need a year or more to develop, but the best ones frequently take at least three or four months to materialize. At least that’s been my experience.
As for the NZDUSD, the pair remains capped by the same (former) channel bottom I illustrated on November 9. So if you’re looking to buy the pair, you may want to wait for a daily close (using 5 pm EST New York close charts) above that level before doing so. See chart below.
I’m not a fan of playing a downside break here given the false move below 0.6820 on November 17. If I don’t have a precise level from which to trade a breakout, I stand aside.
I will, however, consider buying a daily close above former channel support. But given the holiday liquidity lull, I will require bullish price action on a retest of the area as new support. If it happens, we could see the NZDUSD revisit the trend line from the September 2015 low.
The recent U.S. dollar strength could also put a damper on any upside potential. We have seen the currency strengthen across the board this week. If that theme carries over into next week, NZDUSD bulls will find it difficult to make any significant progress.
For now, this is a waiting game. I don’t want to get caught in the consolidation between 0.6820 support and 0.6900 resistance. There isn’t much in the way of New Zealand dollar news next week. However, there is a Fed rate decision on Wednesday at 2 pm EST.
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