11-YEAR SUPPORT KEEPS AUD- NZD IN CHECK
This pair has just completed another bearish wave within a large Pennant setup on the Daily Chart to now settle at the Support area of 1,0615. This Consolidation has been formed following a strong downtrend in favour of the Kiwi, stretching back to March of 2011. It also coincides with a major Support area of 1,0612 being tested for the first time since being formed by a set of Triple Bottoms between 2003 and 2008. Now that the pair has reached this important juncture, we will either see a rally to return to the Resistance of the Pennant or a strong break of the Support to continue the downtrend for the rest of 2014.
The chart below shows us the current position of the pair within the Pennant. Following a short-lived breakout above the Resistance, it U-turned sharply to return inside of the Consolidation, forming a downtrend line in the process.
In the next chart, we can see the downtrend that preceded this Pennant which led to the 3-year decline of over 3,000 Pips.
We can further appreciate the significance of the current consolidation by looking at the set of Triple Bottoms that were formed over a five year period. When tested for the first time, major Support or Resistance areas such as these usually lead to strong pullbacks or large Consolidations being formed. They can then lead to either a complete reversal in the trend or a breakout that resumes the current direction of the market.
So given this overall setup for the pair, what are we likely to see take place in the next few days or weeks? Taking a closer look, we can see that a rally to Resistance would lead to a break of the downtrend line formed while a continuation of the overall downtrend will require a strong break of the Support boundary.
One of the risks of trading within Consolidations, however, is that the movements can be very erratic. Sometimes the signals and the trends that follow can be strong and smooth in one direction and then be unexpectedly volatile and risky when going in the other direction. This requires carefully choosing the best signals for entry. A trader should also ensure that there is at least 100 Pips of gains that can be comfortably attained as the smaller the distance between the boundaries the more volatile the trend becomes.
Breakouts from these boundaries also have to be careful analyzed to avoid unexpected reversals- the dreaded False Breakouts. Given the size of this Consolidation, a breakout should be preceded by the formation of a setup such as a smaller Consolidation or a Counter Trend Line. Both can be formed within the boundary or shortly after it is broken. This becomes increasingly necessary when the currency pair is close to or has reached its Weekly or Monthly Range as is the case here, since False Breakouts tend to appear at these areas if there aren't any of these breakout setups- the main reason for the False Breakout at Resistance.
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