In this educational post, we’ll introduce the confluence concept. After this, we’ll apply to analyse the NZDUSD cross.
The confluence concept
A confluence is a convergence or meeting at one point from two or more objects. In technical analysis, the confluence is between levels calculated by a mathematical approach. In our case, the confluence corresponds to two or more Fibonacci levels.
The confluence, or cluster zone, is an area where the price could react from, for example, an exhaustion zone. In this zone, the price might develop two potential moves, consolidation or reverse the main trend.
The NZDUSD case
The NZDUSD cross in the 4-hour chart shows a long-term bearish sequence with two declines. In the short-term, the price looks a consolidation structure in progress. The structure could correspond to a triangle pattern.
To this case, we use the Fibonacci expansion tool in the upper and the lower degree structure. The first confluence is between the two 127.2 levels on the 0.6448 area. Considering the potential triangle structure, we expect a bounce and a new decline. The potential bunce could drive to the price near to the 0.6657 and 0.67 zones (previous short-term highs.) The second scenario occurs if the price declines below the 127.2 level. A more profound drop to the confluence between the 161.8% of the upper degree cycle and the 200% of the internal wave (0.6177) should complete the bearish sequence. Once the price tested this area, the NZDUSD price should create a connector giving way to an upward cycle of upper degree. The invalidation level of the high degree bearish cycle is at 0.6941. (Click on the arrowed square to enlarge the chart)
Remember that there is no 100% winner trading method. Confluences by themselves don’t guarantee the success of a trading decision. Market entry or exit should be validated with the price action.
For further information about corrective structures, you can read our post:
– Understanding Corrective Waves – Part II – Triangles and Trading Setups.