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NZDUSD: Here’s What Triggered Yesterday’s Bounce

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If you’re a regular reader of this site, you know that the NZDUSD confirmed a five-month head and shoulders pattern last week. The 480 pip formation began in mid-June and broke down on November 17th.

Here’s the reversal pattern for those who missed it:

nzdusd-head-and-shoulders

Before closing below the neckline, the pair also broke the ten-month trend line that extends from the 2016 low. The combination of these events paints a rather bearish picture of the risk-sensitive pair.

However, after carving out fresh lows for the week, the NZDUSD bounced back yesterday, rallying 80 pips from the session low. This put sellers in the hot seat as they were forced to defend former neckline support as new resistance.

So far so good. But what caused the pair to rally so aggressively yesterday?

I mentioned the 0.6966 handle over the weekend but yesterday’s low missed this level by nearly 20 pips. So while this area may have attracted a few bids, it wasn’t the main catalyst in my opinion.

For those who studied this lesson, you know exactly why the pair found support yesterday at 0.6984.

If we strip away the head and shoulders annotations, we can clearly see a descending channel that extends from the 2016 high.

nzdusd-channel

Now, does this mean the NZDUSD is gearing up for a rally? Not necessarily. While nobody knows for sure, it’s my view that the two breaks I mentioned at the beginning of this post trump the pattern above.

The reason for this is that the trend line support and head and shoulders have been around for ten months and five months respectively. In comparison, the descending channel above began forming less than three months ago.

So regarding price and time, the two support levels that broke last week are, in my opinion, more influential than this three-month channel.

I’m still holding short with an initial entry at 0.7331. And if nothing else, the confluence of support at 0.6966 gives me more reason to add to the position (again) should sellers prevail.

We’ll know soon enough which price structure has the greater influence. A close below the 0.6966 handle would expose 0.6840 while a close back above former neckline support would put a wrinkle in the five-month reversal pattern.

Note that things could slow down a bit as we approach the U.S. Thanksgiving holiday on November 24th.

Want to see how we are trading this setup? Click here to get lifetime access.

nzdusd-support-and-resistance

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6 comments
Ubagu says

Excellent analysis. The compromise (between the Resistance line (red) and the confluence of support lines (red + blue) leaves a pip gap of at least 100. Going short at the indecision candle bouncing off the Resistance line provides the best opportunity for a probablistic decision – the R : R still looks good (@ least 1 : 2). So I may still go short (risky) until the trade shows me its true hand (move).
Cheers

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Sal says

Im in agreement with you on this H&S pattern and I wasn’t too spooked by the rally. I had figured it would be so for a few reasons…..I am admittedly a very primitive at best supply and demand follower and much more prefer the type of analysis you provide but for the sake of argument I will say that the little I know of supply and demand gave me the inkling that the July 22nd and 25th candles would be considered demand….on a side note, the fact that they also landed on a whole number like 0.7000 and a major Support level also had to count for something important. Im holding this short and keeping my fingers crossed that the rally is short lived ;o) Happy Thanksgiving to you!

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    Justin Bennett says

    Thanks. Same to you, Sal.

    Reply
Milen says

Great post
I just want to point out AUDJPY 2 years old channel has been broken to the upside. What is your opinion about it
Thanks a lot in advance

Reply
    Justin Bennett says

    Thanks, Milen. No comment on AUDJPY at the moment.

    Reply
ofentse says

good tip I made some cash so do have more?

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