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What’s inside:

  • RBNZ cuts rates, NZDUSD rallies, but reverses sharply
  • Reversal comes at stiff area of resistance
  • Good risk/reward opportunity

On Wednesday night the RBNZ cut rates by 25 bps as expected, sending the benchmark rate down to a record low 2%. Following the outcome of the meeting NZDUSD rallied sharply, but then reversed nearly all its daily gains to form a ‘pin’ bar, or in this case, given the bearish signaling and length of the tail on the candle, I also like to refer to this candle-type as a ‘death needle’.

The reversal developed after briefly rising above the July high to its best levels since May 2015. On the weekly chart the 7200/300 zone represents good resistance from back in early 2015 and top-side parallel, as well; an area kiwi has struggled with since late June. The rise above and swift rejection tells you a lot about where buyers and sellers ‘live’.

The optimal entry comes on a counter-trend rally back into the reversal bar, reducing the distance between the point of entry and stop (above yesterday’s high), while widening the profit potential. The target is in the 6950/70 zone, prior support on three occasions since June.

A head-and-shoulders could be in development here, with yesterday acting as the right shoulder. It will require a decline into support and eventual break of the neckline to trigger the pattern, but it’s certainly in the works.

For now, we will focus on establishing a solid entry on a countertrend rally, and either stopping out on a move above the ‘death needle’ high or taking profits on a drop into support.

The trend-line off the tail-end of May running beneath the July low could act as support, but at this time it is viewed as only minor in significance.

NZDUSD Daily

NZDUSD: ‘Death Needle’ Initiates Short Set-up

Weekly

NZDUSD: ‘Death Needle’ Initiates Short Set-up

Trade Parameters:

Entry: 7235/60

Stop: 7347 (10 pips above yesterday’s high)

Target: 6950/70

Risk/reward: 1:2.5+

Hone your skills, find out what makes some traders more successful than others - "Traits of Successful Traders".

---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX.