NZDUSD & Symmetrical Triangles: I taste blood

New Zealand Dollar has broken out of Symmetrical Triangle on Feb 10th. So, what do we know about these patterns. According to the Bible of Technical Analysis:

1. Triangles often form as a part of a larger and more important pattern of some other type. In other words, they are termed as Consolidation or Continuation Patterns. However, Edwards & Magee include this formation in the Reversal Formations section because at 1/4 times Triangles develop at periods of Major Trend change.
2. The odds are greatest as Continuation Patterns in the early stages of Primary Bull or Bear Markets but such odds decrease significantly as Primary Trends mature. 
3. The farther out into the apex of the Triangle prices push without bursting its boundaries, the less force or power the pattern seems to have. The best moves seem to ensure when prices break out decisively at a point somewhere between ½ and ¾ from the base (left-hand end) to the apex
4. No technical chart is 100% reliable, and, of all, triangle is the worst offender.

I think the reason triangles are termed as the least reliable is because of point 1. At the end of the trend, breakouts turn out to be fake. Interestingly, triangle is one of the reversal patterns in Elliott Wave Theory after final wave 5 has been reached. Here is a good example: EURUSD to 15.02.2011 (sorry i cut out bit too much from the right side & as a result you can not see actual prices). Pic tells much more than i can describe. 

If EUR closes below the apex of the latest triangle it will be in trouble.

Back to NZDUSD.

1. On weekly chart, NZD broke to the downside from triangle after an extended upmove from March 2009. It did not bother even to make a fake upside breakout, it just fell back.

2. Price broke to the downside 3/4 to the apex both on weekly & daily chart.

3.On weekly chart, it closed below two uptrendlines dating from June 2010.

4. Finally pay attention to to green lines which are broadening and are known as Broadening Formations or Inverted Triangles. They are part of the five point reversal like Head & Shoulders and as a rule appear at the end of the Primary Trend.

These four characteristics tell me NZD is in Sell. Now the strategic trade plan:

Sell any throwback to:

1) 0.7550 from Jan 6 swing low

2) 0.7580/99  - the red weekly uptrendline (2nd from below). 50MA (blue line) is right above as well and will hopefully act as a resistance. I say hopefully because flat MAs are useless either as a support or resistance. Green line on the chart @ 0.7660 is where i actually sold...lucky on this one but i will scale into this position as per trade plan.

Stop Loss @ 0.7640. Ideal stop is above rising triangle line (first from the top), currently at 0.7660

Target:  0.7170 approximately

 0.7900-0.7350=450pips => 0.7620-450=0.7170

 If you measure from broken weekly uptrendline, target is 780pips. At this point i am happy with 450pips.

Tactical Trade plan:

Resistance: two horizontal red lines & rising green 200MA. By the time NZD falls (big IF), 200MA will reach bottom horizontal line at 0.7356. The latter is particularly strong and we can use that level on a tactical basis to enter counter-trend buy trades with tight stops. I will post more about it if and when NZD plays out according to the plan.

Good luck Trading

Jesse Livermore quote:

"If a stock does not act right, do not touch it, because, being unable to tell precisely what is wrong, you can not tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit"