Talking Points:

  • The Rare Rounded Bottom in EUR/NZD
  • Why Longs and Shorts Are Viable
  • Playing Proper Defense with This Set-up

The weekly chart of EURNZD is behaving unusually for a currency. It has formed a near-perfect double bottom (so far) and may be going on to form a saucer, or rounded bottom. This is unusual because both of these patterns, especially the saucer, are far more common in equity markets.

Guest Commentary: Potential Rounded Bottom in EUR/NZD

A_EURNZD_Pattern_Rarely_Ever_Seen_in_Forex_body_GuestCommentary_KayeLee_November21A_1.png, A EUR/NZD Pattern Rarely Ever Seen in Forex

Those who are biased to the upside would not be wrong considering:

  1. The double bottom has put in at least a temporary low formation;
  2. The rally off the second bottom was significant and is now forming a bullish flag;
  3. The saucer bottom is still far from complete, but the symmetry of the pattern so far has been significant

That being said, it is just as reasonable to go short EURNZD for these reasons:

  1. Price is in a bull flag, but the flag is still forming, so there should be room for a countertrend short;
  2. Even if it is a saucer bottom, this is still relatively early in the reversal (price is not even out of the bottom half of the saucer yet). This is where bulls and bears would fight it out, giving plenty of opportunities for both sides.

Thus, the best approach would be to take longs and shorts as the opportunities arise, with a slight bias to the buy side.

On the daily chart below, the flag looks more like a wedge or pennant, depending on which school of chart pattern analysis one subscribes to. Either way, price has to break the upcoming resistance before it can head higher.

Guest Commentary: EUR/NZD Short off Declining Resistance

A_EURNZD_Pattern_Rarely_Ever_Seen_in_Forex_body_GuestCommentary_KayeLee_November21A_2.png, A EUR/NZD Pattern Rarely Ever Seen in Forex

As the declining resistance line was composed over so many daily bars, there should be ample intraday opportunity for shorting it by way of an intraday scalp trade with an outside chance of turning it into a larger move. As discussed previously, the general bias slightly favors the upside on the weekly chart, so this trade must be managed defensively.

The four-hour chart below shows some surprising clues which suggest that prices may not reach the declining line of resistance before turning:

  1. Most significantly, the upward thrusts are becoming weaker, suggesting that the current upward move may not reach equality with the previous one. Thus, a Fibonacci expansion has been used to estimate the 61.8% level as a possible turning area.
  2. Two further levels of resistance from previous price action also suggest that prices may struggle to go above the zone marked on the chart, which is 1.6373-1.6474.

Guest Commentary: The Key EUR/NZD Resistance Zone

A_EURNZD_Pattern_Rarely_Ever_Seen_in_Forex_body_GuestCommentary_KayeLee_November21A_3.png, A EUR/NZD Pattern Rarely Ever Seen in Forex

On the evidence, this makes the highlighted zone viable at least for a scalp. For the reasons previously discussed, this trade should definitely be broken into two parts so that a portion can be removed at the first sign of trouble. The other position should be moved defensively to breakeven and then trailed for a larger move.

The trigger would be on the hourly chart (not shown), with a pin bar, bearish engulfing pattern, or reversal divergence. As always, it is worth being prepared to give this set-up two or three tries in order to get the trade right.

In addition, for this particular case, it would also be wise to take a smaller-than-normal position just in case the trade only moves a small distance into profit before rallying upward to test the trend line properly. It’s a trade worth taking mainly because prices may never get to the resistance level, but it is most important to do this defensively.

By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com