What's inside:

  • EURNZD has converging lines of support and resistance forming a triangle
  • Offers possible opportunity for the range-trader and breakout trader
  • For now watching reversals off these lines, breakout to take place later

Starting back to the very end of 2015 EURNZD has been ebbing in a fashion which is working the cross towards the apex of a triangle. The narrowing range is presenting a clear contracting upper and lower boundary (top/bottom-side trend-lines) from which traders can look to take ‘fade-trades’ back in the other direction until the triangle pattern matures and makes a break for it.

At this time, buying a dip into the rising lower trend-line could offer a swing trade back up towards the upper trend-line. Should it rise back towards the descending line of resistance and show signs of momentum turning lower, then a short could be initiated with the idea in mind we will see further contraction in the multi-month pattern.

Eventually the triangle will break and likely in the next few weeks; this is where one will need to shift gears from ‘range-trader’ to ‘breakout-trader’ mode. Which way will it break? The trend prior to the triangle formation suggests the break will continue along that path of least resistance (in this case, lower) and act as a continuation pattern, but that does not mean it must break in that direction. This is why breakouts from technical formations are best reacted to, not predicted.

With that said, it could lead to a strong move in either direction, but for now intersecting lines of support and resistance offer the range-trader technical references from which to operate off of.

High Risk Event Alert: At 21:00 GMT time on Wednesday, the Reserve Bank of New Zealand is set to announce its decision on interest rates. Market expectations are for the central bank to cut from 2.25% to 2%.

EURNZD Daily

EURNZD: Potential Opportunity for Both Range and Breakout-trades

Levels to Focus On (Note: The entries and exits are moving targets as the lines converge. Keep in mind risk/reward ratios should be roughly 1:2 or greater when entering)

Range-trades:

Long trades: Reversal off lower trend-line

Short trades: Reversal off upper trend-line

Targets: Opposite side trend-line

Breakout trade:

Long trades: Strong daily/weekly close above top-side trend-line

Short trades: Strong daily/weekly close below bottom-side trend-line

Target: The height of the formation points to a measured move of ~1400 pips from the breakout price

Find out what common mistakes successful traders commonly avoid in our free guide, "Traits of Successful Traders."

---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX, and/or email him at instructor@dailyfx.com