Over the weekend I mentioned the possibility that NZDUSD had put in a near-term top with last week’s false break above channel resistance, a level that intersects with two prominent lows from February and March of last year.
In addition to the false break, last Friday’s post-Brexit plunge resulted in a massive 330 pip bearish engulfing candle. This formation along with the false break of the 0.7180 handle suggested that downside pressure would persist.
However, the kiwi has once again shown resilience in the face of what began as a gruesome scene amid last week’s referendum. After gapping down to start the new week, the risk-sensitive pair has bounced back 154 pips from the 0.6986 handle with today’s high reaching 0.7140.
But despite this recent strength, NZDUSD has barely managed to breach last week’s close at 0.7120. While there’s plenty of time for that to change, the intraday charts are beginning to indicate that this rally may be running on fumes.
The 1-hour chart below tells the story.
The ascending channel above could very well be a sign of near-term exhaustion after Friday’s meltdown across risk assets. An ascending formation that follows a sharp move lower is most often considered a bearish continuation pattern.
Does that mean a close below support would be tradable on its own?
Perhaps, but I believe that a far more robust opportunity would materialize with a daily close below 0.6986. This level has served as support on several occasions since mid-June and could, therefore, signal a material weakness in the pair should the level fall in the coming sessions.
What’s interesting about this potential move is that at 314 pips, the range between 0.6986 and last week’s high of 0.7300 is nearly identical to the distance from 0.6986 to the May low of 0.6675. In fact, only three pips separate the two.
However, as of now, this is all just an idea and one that requires more time to develop before it can be considered an actionable trade setup.
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