NZDUSD bulls are at it again. On Sunday, I discussed a potential buying opportunity just above 0.6600. The pair had just cleared descending channel resistance and was looking increasingly bullish.
The recent bull move has been no surprise to readers of this blog though. I wrote how the NZDUSD market structure hints at a reversal back on the 16th of October. The market was trading at 0.6590 at the time or about 200 pip below today’s price.
Although we never quite got a retest of the 0.6600 support area I mentioned on Sunday, you could tell something was brewing by the market’s refusal to move lower on Monday. And by Tuesday, it was clear that buyers were in control.
You may recall from Sunday’s commentary that 0.6715 was the next key level on our radar. At the time, it was still serving as resistance. You can see how this area acted as support throughout July and later rejected the August advance.
However, buyers didn’t give much thought to it during Tuesday’s rally. Instead of reversing or even pausing, NZDUSD bulls closed the pair well above it.
Yesterday’s 0.6736 close meant that our key level at 0.6715 is now acting as support. And just as we’d expect, the pair caught a bid from 0.6715 earlier in today’s session.
The one downside to buying the New Zealand dollar at current levels is the distance from the daily mean. As you probably know by now, I use the 10 and 20 exponential moving averages (EMAs) to represent the average price on the daily time frame.
At the moment, the pair is approximately 150 pips above the mean. Even this morning’s retest of new support at 0.6715 was about 90 pips above the 10 and 20 EMAs. It’s always a bit risky to enter when a market gets overextended like this.
The counterargument to that is that separation from these moving averages is indicative of strong momentum. And that’s what we want when looking to buy or sell a market.
But for me, I need to see a reversion to the mean before I’ll consider an entry. For the NZDUSD, that would be a pullback into the 0.6715 area over the next few days.
Notice I wrote, “over the next few days”. It’s imperative that we see a gradual pullback into new support. A sudden drop to 0.6715 would suggest buyers are losing control, in which case a wait-and-see approach would be the best bet in my opinion.
A gradual pullback into 0.6715 followed by bullish price action would set the pair up for a run at the next key resistance at 0.6850. If the market doesn’t pull back and you aren’t in this one yet, it may be best to stay on the sideline so that you aren’t chasing a runaway market.
Alternatively, a daily close at 5 pm EST below 0.6715 would open the door to the support area I mentioned on Sunday at 0.6600.