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:
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.
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.
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