Matt Weller, CFA, CMT
Faraday Research
Since bottoming at .8050 in early February, the NZD/USD has formed one of the strongest trends in the currency market. Just last week, rates ticked above the .8700 handle for the first time since July 2011, though the pair was unable to finish the week above that level. Now, in the midst of a likely quiet pre-holiday trading week, technical signs suggest the bulls are growing weary and the bears may now have their time in the sun.
Tackling price first, the NZD/USD has been currently struggling to break conclusively above .8675 for the past few weeks now. That level marks the convergence of the 127.2% Fibonacci extension of the Oct. 2013 to Feb. 2014 drop, as well as the prominent high set back in April 2013. Last Thursday, the pair put in a large Dark Cloud Cover* candlestick formation after setting a new high, suggesting a shift from buying to selling pressure and raising the likelihood of a near-term top.
Beyond the convergence of major price resistance levels, the secondary indicators clearly underscore declining momentum in the market. The RSI has now put in lower highs on the last three higher highs in price, creating a triple bearish divergence. The MACD indicator has similarly started to turn lower , suggesting waning bullish momentum. Just as a ball thrown into the air must slow down before reversing, falling momentum is often a reliable precursor of a near-term market top.
If we have seen a near-term top in the pair, a pullback to at least the .8600 handle, if not the mid-.8500s is likely this week. Meanwhile, a break below previous support at .8500 would suggest a deeper retracement is likely over the remainder of the month. On the other hand, better-than-expected GDP data out of China (New Zealand’s 2nd most important export market) in tomorrow’s Asian session could reinvigorate bulls for a possible retest of the recent highs near .8740 ahead of the holiday weekend.
*A Dark Cloud Cover is formed when one candle opens near the top of the previous candle's range, but sellers step in and push rates down to close in the lower half of the previous candle's range. It suggests a potential trend reversal.
This research is for informational purposes and should not be construed as personal advice. Trading any financial market involves risk. Trading on leverage involves risk of losses greater than deposits.
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