One of the strongest technical patterns in trading is the head and shoulders pattern. This pattern can be confirmed by using trend lines, Fibonacci levels, support or resistance lines and rounding.
Price action on the daily chart on the NZD/USD displays the end of a major rally that has been in place since the beginning of September. Price formed the top of the left shoulder on September 19th and then fell towards the 200-day Simple Moving Average (SMA). After surging towards .8543 on October 22nd, price has had a minor pullback again targeting the 200-day SMA around .8168, thus completing the head portion of the pattern. The right shoulder then formed after a rally stalled after failing to recapture the .8400 handle.
If bearish momentum continues, traders may see a decline break out below the “neckline” support area around .8150. Further bearishness may confirm the downward reversal and target .8050 which is the 161.8% Fibonacci expansion level of the left shoulder low to high move. Extreme bearishness may find the next level of support at the psychological .8000 handle.
The trade: Sell NZD/USD if price declines to .8148, with a stop loss at .8205, and a take profit at .8055. The Risk/Reward Ratio is 1:1.63.
Edward J. Moya
WorldWideMarkets Online Trading