4Xlounge Technical Review – NZD/USD – February 1, 2012

The 4Xlounge Technical Review discusses the most commonly traded currency pairs from a technical point of view specifically considering a number of the 4Xlounge custom indicators. Here we aim to identify the strongest current trends in the Forex market and the most logical possible trade set-ups. Although normally uncommon, today we will consider a possible reversal scenario in the NZD/USD.

The 4Xlounge Bigger Picture Market Barometer based roughly on monthly charts illustrates the relative strength of each currency on a scale of 0-99. Generally speaking those currency lines with an upward slope occur when its currency is rising while those to the downside show currencies moving lower. When these trends emerge traders under most conditions will opt to open a position in the same direction of its trend, however at times two currency lines will approach extreme conditions where a reversal may occur. These extreme conditions are known to occur when one currency line crosses above ‘70’, while another crosses below ‘30’, or when there is at least a 40-point ‘spread’ (difference) between the two; i.e. 72 & 32, 68 & 28, etc. Once these currencies diverge from one another, traders will then look for the reversal signal as those currency lines cross back below ‘70’ and back above ‘30’ respectively. Shown below the Bigger Picture Market Barometer currently shows the NZD which has nearly reached the ‘75’ level while the USD remains just above the ‘35’ level indicating the NZD/USD has approached what could be considered ‘Overbought’ in the near-term future.

4Xlounge Bigger Picture Market Barometer - February 1, 2012

We can now take a closer look at the immediate trend the NZD/USD is experiencing. The 4Xlounge Technical Dashboard Console displays the strength of each pair’s trend on a scale of 0-99, with those painted green represent markets moving higher, and red figures indicate those pairs with a trend to the downside. Generally speaking ‘significant’ trends occur when the Global Trend Value (figure to the right of each pair) exceeds ‘30’. Historically the higher the figure, the stronger the trend except for those rare occasions when that currency pair reaches an extreme ‘Overbought’ or ‘Oversold’ condition, which occurs when the Global Trend Value reaches or exceeds ‘95’. Shown below the Technical Dashboard Console currently shows the NZD/USD has a Global Trend Value of ‘92’ indicating the current trend is quite strong, as this pair may reach a critical reversal point in the near-term future. Furthermore the daily time frame (dial to the right-hand side) is currently indicating a maximum value of ‘100’ showing on a long-term basis this pair has experienced a very significant move to the upside and a reversal back to the downside is possible.

4Xlounge Technical Dashboard Console - February 1, 2012

At this point we will reference the actual price chart so we may determine if the NZD/USD has reached a specific price level where traders may also anticipate a reversal. The following (daily) chart shows over the course of the past few months the NZD/USD has in fact experienced a steady trend to the upside and currently rests very close to the 78.6% Fibonacci retracement level. Like any Fibonacci line, traders may anticipate this as a level where reversals may occur.

NZD/USD - Daily chart - February 1, 2012

Of course all this tells us that the NZD/USD is in fact experiencing a very strong trend to the upside and the likelihood is that the pair can very easily continue higher. In addition if the NZD/USD is able to break above the 78.6% Fibonacci, traders may anticipate this pair could retest the 100% retracement levels higher up on the chart. However with that said, given the fact that a number of our technical indicators hint that a major reversal may be in the future, we should simply be on the lookout for additional signs that the market is ready to turn back to the downside. Again, during the brunt of any trend it is in our best interest to always do our best to trade only in the same direction as this trend. However as the market reaches extreme levels we should simply consider the likelihood that this trend has run its course and a reversal may occur in the near-term future.

We wish you the best of luck in all your trading endeavors.

Sincerely,
Adam Rosen
adam@4Xlounge.com