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Bearish NZDUSD As Double-Topping Pattern Develops on Divergence Into 200-DMA

Bearish NZDUSD As Double-Topping Pattern Develops on Divergence Into 200-DMA

2016-01-04 15:10:00
Tyler Yell, CMT, Currency Strategist
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Point to Establish Short Exposure:0.6682 55-DMA, December 18, Low Trade Setup

Spot: 0.6751

Target 1: 0.6427 November 18th Low

Target 2: 0.6195 August 24th Low / Double-Bottom Partial Target

Invalidation Level: Close above 0.6900 (November High)

Fundamental & Technical Focus:

Welcome to 2016! As of this writing, NZDUSD is down 2%, but what is interesting is the resistance from where price is falling. Right now, the New Zealand Dollar is the weakest G10 currency to start the year, dropping by over 2%. What is curious is that the New Zealand Dollar ended the last two weeks of the year alongside the Australian Dollar as one of the G10s strongest vs. the US Dollar. Typically, selling the strongest currency or buying the weakest currency is not encouraged at the market. However, as many traders know, these currencies can be very attractive for multiple percentage moves in a reversion to the mean/ average that may be playing out right now.

If the New Zealand Dollar is in fact, going to revert to 2015 support, then we can look for triggers that show us the move may be happening as well as attractive currencies to buy against a mean reverting currency. The technical cause for a potential NZD top turning into another downtrend is due to a confluence of resistance points on the chart. First, the price has bounced off the 200-DMA (0.6837), which aligns with the October top bringing us a double topping pattern. Additionally, the zone that price has fallen 150 pips from is also between the 38.2-50% retracement zone of the April to August range. A strengthening of the US Dollar would align with the seasonal studies showing that US Dollar tends to outperform other G10 currencies in January.

Right now, our Trader Sentiment Indicator SSI is providing a bullish bias. This reading on SSI gives us caution and a preference for a breakout to confirm the trade. The ratio of long to short positions in the NZDUSD stands at -1.60, as 38% of traders are long. We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives a signal the view that the NZDUSD may continue higher.

While fully possible that the Federal Reserve pulls another move akin

Chart:

Bearish NZDUSD As Double-Topping Pattern Develops on Divergence Into 200-DMA

One last technical note is the Bearish RSI divergence. Large RSI divergences should not be ignored because they can provide a clue as to the lack of momentum that brought the price to the second high. Such an RSI divergence into the 200-DMA can show us that the move higher was weak, and the move lower may be more aggressive as the larger trend reasserts itself and the weak longs that were in that previous trend bail on their positions.

Key Technical Levels:

NZD/USD -- Biggest intraday selloff since Oct.

* 2nd resistance: 0.6897 Oct. 15 high

* 1st resistance: 0.6834 Jan. 4 high

Spot: 0.6751 December 18th Low

1st support: 0.6710 38.2% Fibo of Nov. 18-Dec. 19 rise

2nd support: 0.6682 55-DMA, Dec. 18 low Trade Setup

Trade Setup:

I am looking to sell NZDUSD on confirmation that price is breaking below key support. A daily close below 0.6682, the 55-DMA and December 18th Low Trade setup would turn attention to the two targets mentioned above. First, the November low at 0.6427 followed by the August 24 low of 0.6195. The initial stop will be at 0.6900, right above the recent high with a preference to move to break-even when prices move in the intended direction lower. This target aligns with a favorable risk: reward ratio that our Traits of Successful Traders report found to be one of the best things a trader can do to ensure long-term sustainability in your trading.

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