NZD/USD – Head and Shoulders Signals Potential Reversal

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NZD/USD - Head and Shoulders Signals Potential Reversal

In February, NZD/USD has so far made 2 bullish swings. First, it rallied from the low on the year at 0.7176 up to 0.7448, where it stalled for about a week, consolidating between 0.7448 and a low of 0.7313. Then the second swing came from that 0.7313 low and reached a high last week at 0.7573.

NZD/USD 1H Chart 2/23
nzdusd 1h chart 2/23
(click to enlarge)

The 1H NZD/USD chart shows the second of the upswings this month. For the most part, the short-term bullish trend is still in play. However, price is starting to form a head and shoulders pattern, with a neckline around 0.75.

A break below 0.75 would complete this topping pattern. If the RSI clears below 40, it would reflect loss of the prevailing bullish momentum. We can also see that there is a support/resistance pivot right under the neckline, at 0.7480. Note that the 200-period SMA also resides here.

If price bounces off 0.7480 and is able to climb back above 0.7540, the H&S pattern signal would be a weak one, and the bullish outlook would remain in play in the short-term.

What if the head and shoulders pattern sticks and price action respects it as a general resistance zone? Let’s look at the 4H chart.

NZD/USD 4H Chart 2/23
nzdusd 4h chart 2/23
(click to enlarge)

The head and shoulders pattern could be an early sign of bearish reversal in the short-term, which would be a bearish continuation signal for the medium-term. The 4H chart shows a market that has been in bullish correction. The 0.7440-0.7450 area could be another key support for the bullish correction outlook. This is a previous resistance level reinforced by a rising trendline.

On the other hand, a break below 0.7440 would expose the 0.7320-0.7340 support area before opening up the 0.7176 low on the year. In this scenario, there is also risk of extending lower towards the 0.71 handle in continuation of the prevailing downtrend that we can see in the daily chart.

NZD/USD Daily Chart 2/23
nzdusd daily chart 2/23
(click to enlarge)

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.