Talking Points:

  • Divergence Signals Potential for Reversal
  • 2 Most Likely Scenarios for NZD/JPY
  • The NZD/JPY Entry Signal to Watch for

Most major currencies are consolidating and taking their breaths after last week’s major moves. This would normally mean a better market for the crosses, but in this case, the moves have confused those markets as well. In light of that, the takeaway is clear: Trade with caution.

That said, the best response to this environment is to continue to take trades, knowing that although they have lower probability, the price of not taking them could well be missing the one trade that does shoot in our direction. It’s my belief that NZDJPY could be that one favorable trade scenario.

As shown below, the weekly chart of NZDJPY is an uptrend, and the most interesting thing about this chart is the divergence that formed two weeks prior.

Guest Commentary: Bearish Reversal Divergence in NZD/JPY

A_NZDJPY_Set-up_Thats_the_Best_of_the_Bunch_body_GuestCommentary_KayeLee_November4A_1.png, A NZD/JPY Set-up That's the Best of the Bunch

The large bearish engulfing candlestick is also indicative of some possible downward momentum. Since that original signal, we have not had any bearish candles on the weekly time frame. Given that a bearish reversal divergence scenario should generally produce sideways to bearish price action for the next few bars, this suggests that we may stand to catch the high of this week’s bar, and wouldn’t it be nice if it turned out bearish, too?

On the daily chart (see below), there are two scenarios that are most likely to develop from this point on, although that’s not to say that they are the only possible scenarios.

  1. Price goes to test the underside of the broken trend line and then races down to test the longer-term trend line
  2. Price ignores the trend line and goes into a range type of motion before continuing on its way

Guest Commentary: The 2 Most Likely NZD/JPY Scenarios

A_NZDJPY_Set-up_Thats_the_Best_of_the_Bunch_body_GuestCommentary_KayeLee_November4A_2.png, A NZD/JPY Set-up That's the Best of the Bunch

Again, there is a multitude of other possibilities, but these two show extremes of what could go right with this trade and what could go wrong. It is highly dependent on the weekly chart’s reversal divergence coming back into force.

As always, uncertain trades call for hair-trigger entries, and for that, it pays to use the lower time frames.

The four-hour chart below provides a set of resistance levels that, when taken together, form a zone. Two levels were taken off pin bars from the previous upward move, as marked. The resistance in between them is the 50% Fibonacci retracement level. Together, these levels should form a zone at least strong enough to cause a reasonable reversal on the hourly charts.

As a bonus, the Stochastic is overbought, as price is heading up to the resistance zone, allowing for reasonable downside.

Guest Commentary: The NZD/JPY Entry Signal to Watch for

A_NZDJPY_Set-up_Thats_the_Best_of_the_Bunch_body_GuestCommentary_KayeLee_November4A_3.png, A NZD/JPY Set-up That's the Best of the Bunch

The trade should be taken on the hourly chart as price gets into the price zone and shows signs of slowing down, usually through some form of reversal divergence.

In these markets, the wise thing to do would be to divide the trade into a short-term position and a long-term position. The short-term trade should be taken off at the first sign of trouble on the hourly charts, and the longer term trade—once risk has been reduced or eliminated through the short-term component—should be trailed less aggressively in hopes of possibly catching a very large move, should it develop.

See also: A 2-Part Trade in GBP/NZD

By Kaye Lee, private fund trader and head trader consultant,