Good morning traders,
We’re presented with a potential short setup in NZDUSD.
Consider the 4 hour chart of NZDUSD below:
As you can see in the chart above, price has recently broke out of a short term uptrend. While this could just be a retracement, it’s worth noticing the formation of a bear flag at current levels.
A bear flag is a continuation pattern where short term sideways to higher price action is followed by a decline to new recent lows. While it’s too early to say we’re in a downtrend on this pair, it is clearly evident that after a recent down move, a bear flag has formed. Let’s break this down further on the H1 chart..
A couple of things to note here – we have the short term signs of an uptrend within our flag channel, as shown through higher highs and higher lows. However, we also saw confluence with our downward trendline and the top price channel both rejecting the move higher.
For our bear flag to remain valid, price needs to respect our horizontal resistance shown, and for increased probability respect our downward trend line. As always it’s important to wait for the break with technical setups like these. Should price break out of our bear flag (fail to make a higher high and break through our recent low), we have potential profit taking and stop loss levels as shown below.
It’s always good practice to always define your risk first, so I would place an initial stop above the recent swing high, above .73108. You’ll notice that this level has also acted as previous resistance and support recently. As far as a target level goes, ideally price would continue the full movement through to our .70284 level, which is the length of the ‘flagpole’ and incidentally a prior area of consolidation, however it’s important to note potential areas of support as possible profit targets.
At present, I’m on the sidelines with this trade, however will be watching closely for our setup to be confirmed.
Until then traders, stay tuned for updates on this setup and as always, set your stops and live to fight another day.
Best of probabilities to you!
Source: Vantage FX Blog