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Why Traders Should Be Wary of the Kiwi Head and Shoulders Break

Why Traders Should Be Wary of the Kiwi Head and Shoulders Break

Benjamin Spier, Technical Strategist

Talking Points:

  • NZD/USD falls below the neckline of a head & shoulders pattern
  • A previous head & shoulders pattern failed to show follow through
  • Support remains at .8110

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Many chartists refer to the head and shoulders pattern as one of the most reliable technical indicators, but recent price action should make us wary of the recent head and shoulders pattern seen on the 4-hour chart in NZD/USD trading.

Although the Kiwi/Dollar pair has been consolidating since setting a 2-month low in late November, the pair began an uptrend on the 4-hour chart on December 29, which continued until a new 2-month high was set above .8400. NZD/USD then found support again by the forming neck line slightly above 0.8200, and the pair went on to set a lower high, which constituted the right shoulder of the now visible head and shoulders pattern.

NZD/USD 4-Hour: January 30, 2014

Why_Traders_Should_Be_Weary_of_the_Kiwi_Head_and_Shoulders_Break_body_Picture_3.png, Why Traders Should Be Wary of the Kiwi Head and Shoulders Break

NZD/USD just closed below the neckline at the end of Wednesday’s trading day, and the guidelines of a head and shoulders pattern now predict that the Kiwi will decline the legnth of the distance between the top of the head and the neckline, which is 221 pips and suggestive of a fall to the key .8000 level.

However, if you pullback to a daily timeframe, we see a similar setup in the fall of 2013. The Kiwi posted a clear head and shoulders pattern around a neckline only slightly above the neckline of the more recent pattern. NZD/USD closed below the neckline on November 21, but the reversal to the downside was only about 140 pips instead of the projected 300 pips. The pair failed to close below the resistance turned support horizontal line at .8110 that began in June of 2013.

NZD/USD Daily: January 30, 2014

Why_Traders_Should_Be_Weary_of_the_Kiwi_Head_and_Shoulders_Break_body_Picture_2.png, Why Traders Should Be Wary of the Kiwi Head and Shoulders Break

The range that has continued since then remains in play, and the support at .8110 that stopped the last H&S reversal may also put the breaks on the current downward Kiwi movemet. Furthermore, an upward trendline that began in June of 2010 may now provide support around .8190.

NZD/USD Weekly: January 30, 2014

Why_Traders_Should_Be_Weary_of_the_Kiwi_Head_and_Shoulders_Break_body_Picture_1.png, Why Traders Should Be Wary of the Kiwi Head and Shoulders Break

Therefore, a close below the horizontal line at .8110 may be necessary for traders to look for a completion of the projected reversal of the more recent head and shoulders projected downtrend to .8000. Until then, it is hard to say that the congestion from fall 2013 has ended. Alternatively, resistance to an upward movement in Kiwi may come in by the 3-month high at .8432 or by the yearly high at .8544.

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Charts created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to instructor@dailyfx.com .

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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