Pennant formation marks inflection point for NZDUSD

The NZDUSD pair started off the year uneventfully by making a series of slow descends from 0.6757 to 0.6193 from the period of January to March 2020. The Covid-19 pandemic, which escalated in March, stirred up high levels of volatility and exacerbated the downward descend by twice the quantum of the first quarter in a period of two weeks, sending the pair to its low of 0.5469.

Since then, prices have been climbing higher, and it has completely recovered from its losses at the start of the year. However, various indications seem to point out that NZDUSD is at a potential inflection point.

The first sign of possible reversal is the price residing at the level of previous resistance, which the pair encountered in April and July 2019 that led to a rejection lower, followed by a close encounter of the level in December 2019, which also led to the pair taking a downturn. In addition, each time the price hovers at the key level, the stochastics oscillator signals an overbought condition - the same occurrence is also currently observed. This validates the level as a strong resistance point, likely to persist with selling pressure.

The second sign is the formation of the rising wedge pattern which is typically known as a reversal pattern. This pattern, coupled with an intersection of the previously identified resistance, brings greater affirmation of the bearish move looming ahead. In tandem with that, the stochastics oscillator has signified overbought condition coincidental to when prices reach the upper bound of the rising wedge pattern.

The stochastic oscillator is a directional indicator as well as a measure of momentum. A reading above 80 signifies an overbought condition while a reading below 20 represents an oversold condition. At this point, note that the stochastics oscillator is residing above the 80 level, further validating a move lower.

The final sign comes from the use of Moving Average Convergence Divergence (MACD) indicator, which is a measure of momentum. Currently, both the signal line and MACD histogram resides slightly above zero with the signal line sloping downwards.

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This exhibits a loss in bullish momentum that will likely limit further upward movement in prices. With that, it brings a confluence of the factors favouring the move lower in the pair.

Based on the formation of the rising wedge pattern, we hold the view that NZDUSD is likely to reverse and break down from the pattern to approach the first level of support at 0.6522.

If support is broken, the subsequent levels of support will reside at 0.5910 and 0.5604.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.