AUDNZD Falls Sharply After The Interest Rate Decision, Has The Profit Taking Zone We Identified Started To Work?

Only Hours After Our Previous Article The Market Delivered A Sharp Reaction

In our previous article regarding ‎AUDCAD‎ and ‎AUDNZD‎, we explained that both currency pairs had reached significant extreme zones after many months of almost uninterrupted bullish movement on the monthly charts.

We explained that after such a long sequence of bullish monthly candles, the market was beginning to approach levels where long term buyers could start taking profits while more professional traders would begin looking for short opportunities.

Now, only hours after the interest rate decision and economic data releases, the market appears to be reacting precisely in the zone we identified in advance.

AUDNZD Printed An Extremely Aggressive Rejection Immediately After The Rate Decision

As can clearly be seen on the attached chart, immediately after the interest rate announcement and central bank statements, ‎AUDNZD‎ experienced a sharp and aggressive decline after reaching the resistance zone highlighted in our previous article.

This was not an ordinary pullback.

The character of the move appears extremely aggressive relative to the pace of the rally seen in recent days.

After a strong upside move, the market produced a very fast rejection while breaking short term support areas within a very short period of time.

Since the release of the rate decision, the price has continued weakening gradually to the point where the monthly candle itself has now turned red.

From a technical perspective, when a monthly candle shifts from bullish to bearish near extreme zones like these, it often signals the first change in momentum after a very long period of one sided movement.

Is This A Classic Buy The Rumor Sell The News Scenario?

One of the main scenarios we discussed in the previous article was the possibility of a ‎Buy The Rumor Sell The News‎ setup.

In situations like these, the market rallies for a long period based on expectations for strong economic data or a hawkish tone from central banks.

However, once the actual news arrives, many buyers who are already sitting on large profits begin closing positions and taking profits.

In many cases, this is exactly when the sharpest move begins.

The Market Was Already Extremely Stretched Technically

Even before the interest rate decision, the monthly charts of ‎AUDNZD‎ and ‎AUDCAD‎ already appeared extremely stretched from a technical perspective.

In ‎AUDNZD‎ we saw a very long sequence of bullish monthly candles, momentum indicators at extreme levels, a breakout above the long term channel and price moving significantly away from its moving averages.

As we explained previously, in the vast majority of cases when price breaks aggressively above a long term channel, even if the bullish move temporarily continues, the market usually returns at some stage to retest the channel area.

Now, exactly as we anticipated in the previous article, the monthly candle itself has already turned red after the pair reached the resistance zone we identified in advance.

The Market Is Beginning To Understand The Importance Of Extreme Zones

In the case of ‎AUDNZD‎, after many months of nearly uninterrupted bullish movement, the market reached a zone where both technically and psychologically an extreme condition had started to develop.

Precisely in these areas, when the majority of market participants become extremely bullish and convinced the price must continue higher, the first warning signs often begin to appear.

As we explained in the previous article, this was an area where long term buyers were beginning to take profits after an unusually aggressive rally, while more professional traders started searching for short entries near technical extreme zones.

Many professional traders do not look to join a move after many consecutive months of upside momentum. Instead, they attempt to identify potential reversal zones near the edge of extreme moves.

In the current case, the market appears to have reacted immediately after the interest rate decision precisely in the risk zone we highlighted in advance.

Is This Only The Beginning Of The Correction?

It is still too early to know whether this is only a short term pullback or the beginning of a deeper correction.

However, from a timing perspective, it is difficult to ignore the fact that the reaction started exactly in the area we identified beforehand as a major risk zone.

In addition, when markets rally for months without meaningful corrections, the initial declines often appear relatively small at first before later turning into a much larger and faster move.

Conclusion

The sharp reaction in ‎AUDNZD‎ following the interest rate decision reinforces the importance of technical extreme zones even during periods when overall market sentiment appears extremely bullish.

Very often, when the majority of traders become convinced the market must continue rising, the first warning signs begin to appear.

For now, it will be very interesting to see whether this is only a short term profit taking move or the beginning of a much larger correction after many months of almost uninterrupted bullish momentum.

This article reflects technical analysis, personal opinion and market interpretation only and does not constitute investment advice or a financial recommendation. Trading financial markets involves substantial risk.