NZDJPY: Long-Term Chart Suggests Major Top Has Formed

King Dollar remains on his throne for another day as all the other peasant currencies continue to battle for second place. While the dollar remains the strongest trend in the market, some traders are growing concerned that the greenback’s rally has gone too far, too fast. For those traders, it can be worthwhile to examine cross currency pairs to evaluate the relative strength and trends independent of the US dollar.

One of the more interesting cross currency pairs on a longer-term basis is NZDJPY. After surging to 90.00 in the first quarter of the year, rates generally consolidated in the upper-80.00s for the last six months. Last week’s big selloff, however, has shifted the bias in favor of the bears for a couple of reasons.

First, last week’s price action created a large Bearish Engulfing Candle* on the weekly chart, showing a sharp shift to selling pressure and foreshadowing more weakness moving forward. This breakdown also confirms a double top pattern around 90.00. In addition, this selloff took rates below the 40-period MA (a proxy for the widely-watched 200-day MA), opening the door for a continuation down to the next level of support near 84.00.

As we go to press, the secondary indicators are also pointing lower. The RSI indicator formed a triple bearish divergence earlier this year, while the weekly MACD has been consistently trending lower for weeks and is about to cross below the key “0” level.

Moving forward, more weakness is favored in NZDJPY. As noted above, the next level of medium-term support to watch is the 38.2% Fibonacci retracement at 84.00; if that floor is breached, a move down to the double top measured move target and 50% Fib retracement near .8200 becomes probable. On the other hand, a recovery to trade back above the 200-day MA near 87.00 would erase the near-term bearish bias and point to likely further consolidation in the upper-80.00s in the medium term.

*A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.