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Are We Seeing a Significant Paradigm Shift on the Japanese Yen?

Mark Shawzin
August 19, 2020

I want to kick off this week's Report with what I see as a huge emerging opportunity in EURNZD (the Euro versus New Zealand dollar) trading pair. I'm going to start by looking at a weekly chart:

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This is a zoomed-out chart which is why the bars are smaller and less visible, but it’s the overall structure going back to 2011 I want to review here. This almost 10-year view of EURNZD allows us to see the truly significant price patterns, movements and levels.

The most important pattern is the classic double bottom in the middle of the chart. That double bottom is also the head of a complex inverted head and shoulders price pattern. (When there’s several shoulders on the left side and the right side of the head, a simple inverted head and shoulders becomes a complex head and shoulders).

Note the neckline of this pattern. EURNZD busted through this awhile back and then fell to re-test the neckline. Right now this looks like a very successful re-test because there’s strong upward momentum in EURNZD.

In fact, I wouldn't be concerned about any back and forth EURNZD price action as any dips are a chance to hop aboard the momentum that will surely come from that complex inverted head and shoulders.

To give you an idea of the potential of this trade, I recommended entering a very similar situation just last week.

Members of my Pattern Trader Elite program or Accelerator program received my GBPNZD (the British pound against the New Zealand dollar) recommendation in an email titled ‘Geopolitical Uncertainty’. Here’s what it said:

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I pointed out that based on long-term and near-term price patterns, GBPNZD looked very bullish and a buy stop at 1.9801 should be a highly prospective trade.

(The trade has worked well so far and I’ll show you an updated GBPNZD chart in a moment. I’m still considerably bullish on this pair thanks to its stealth uptrend.)

Before I dive into the details of that trade, I want to point out that as with EURNZD, it really pays to take a long-term view of GBPNZD. Once you take a step back and look at what's happened to prices over many years, the big patterns and trends become much clearer.

Here’s the updated GBPNZD chart since I made the recommendation to buy:

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But first, the “backstory” …

Despite the fact that GBPNZD was in a huge historic downtrend, back in late 2016 and early 2017 I spotted a simple double bottom price pattern. That’s important because a double bottom is a reversal price pattern, meaning that downtrends become uptrends.

In fact, once a double bottom is confirmed by a breakthrough the neckline, the momentum shifts to the upside.

GBPNZD has moved steadily higher since that double bottom, albeit with a lot of volatility. It’s now 3,200 pips higher.

More importantly, I believe that based on what’s happening right now, GBPNZD prices will continue higher. That’s because in the last few weeks, a subtle double bottom price pattern has emerged.

This newest double bottom is significant because it contains a bullish key reversal bar as the second bottom. That’s when prices crash to a low, but prices close on the high. That informs us that the buyers were in control by the end of the week — and at a very important test along the long-term support line too.

That’s why I expect the trajectory of GBPNZD to continue higher. It’s already 215 pips into profit since last week’s call.

Future progress could be very explosive or we could see some consolidation, but ultimately those with some patience will be rewarded with a longer-term view.

Just be aware that GBPNZD can be quite a bucking bronco with daily volatility in the 300-400 pip range at times. Any such pullback offers an opportunity to add to your long position, however. That’s because I see much higher future prices and future gains much larger than 215 pips here.

EURNZD offers a similar opportunity, which is why I lead off this week’s Report on why you should consider buying any dips in that pair.

Now let’s see how the US dollar is doing by using USDI (the US Dollar Index) as a reference:

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As you may know, USDI tracks the US dollar against half a dozen of the most liquid currencies and right now it’s looking decidedly bearish. In the near term, USDI has formed a head and shoulders price pattern at a previous resistance from a couple of years ago.

What’s more, USDI has recently pierced below the neckline of that head and shoulders and confirmed that pattern. That’s very bearish, but because August is typically a consolidation month where prices bounce within a tight range, there might be a short wait before what I believe will ultimately be a major downtrend in the US dollar.

And if the dollar is headed lower, then it's reasonable to conclude that dollar-correlated pairs such as GBPUSD (the British pound versus the US dollar) will move accordingly.

A weaker USD means GBPUSD will move up. If this seems counterintuitive, remember that the price rises if GBP is stronger than USD. This can happen from a stronger GBP but also from a weaker USD – the end result on the chart is ultimately the same.

We can see that GBPUSD is indeed moving up. Ever since crashing to a 1.15 low at the peak of the pandemic panic, GBPUSD is now trading over 1.30 and forming what looks like an Eve and Adam double bottom.

An Eve bottom is comprised of multiple prongs at a single low and an Adam is a single one-legged bounce. That Adam bottom also seems to have created a bear trap. Those who went short at historic lows are now trapped and experiencing a short squeeze. Any traders still short are really in a world of pain right now.

GBPUSD also broke out of an ascending triangle and is currently consolidating at 1.30 – 1.32 with a series of inside bars. This is right at the first of two key resistance levels and should GBPUSD break out past 1.35, there’s a lot of blue sky above.

GBPUSD also seems to be finally breaking out above its long-term downtrend line. In the past, every time GBPUSD was rejected every time it’s bumped up against that line. However, I don’t see that as the case going forward.

That’s why I’m watching what appears to be a major inflection point in GBPUSD right now. It could be very explosive going forward.

Now let’s examine USDJPY (the US dollar versus the Japanese yen) to see how that price action is developing:

For the last several years, I've been making a fortune by shorting USDJPY rallies and while this may be the case again, I want to examine two different perspectives on potential USDJPY price movements.

The bearish case I’ve used successfully for several years is based on the double top that formed several years ago at the 126 price level which (as part of a larger head and shoulders pattern) has acted as the governing price pattern.

You can see that since the neckline of that pattern was broken, USDJPY has been locked in a bearish downtrend punctuated with periodic rallies. This post-head and shoulders price action can be contained within a bearish descending triangle.

However, I’m now willing to consider the bullish case in this pair.

That’s because USDJPY appears to be forming a foundation at the base of the triangle at 104. I’ll be watching to see how it behaves at the 109 – 110 area if it continues to bounce that high.

If USDJPY should break out above the descending triangle that would be quite bullish.

To see why I’m considering a bullish stance, here’s another perspective on this pair:

We can also view USDJPY price behaviour within a very long-term symmetrical triangle. This is very intriguing because once USDJPY breaks out of this pattern, the direction of that breakout should reveal the next major price direction. That would allow us to hop aboard what would be a huge emerging price trend.

For now, I remain on the sidelines until we see which way USDJPY wants to go.

For comparison, here’s EURJPY (the Euro versus the Japanese yen) from a zoomed-out perspective so we can get the longest-term view:

There’s almost a decade’s worth of EURJPY price information on this chart. What we can spot immediately are the bearish governing patterns: the head and shoulders and more recently a double top.

This is why I felt this pair should continue to the downside, and yet the market had quite a different idea.

And since the market is ultimately the only thing that counts (and not my or anyone’s opinion) that’s why you have to pay attention to price action and defer to that price action.

While the bearish price patterns over the last couple of years did push prices lower for awhile, EURJPY has not been following through. The price has been rallying instead of dropping.

Here’s another view of EURJPY to attempt to explain this:

EURJPY is also trading within the boundaries of a long-term symmetrical triangle after establishing what appears to be a bullish double bottom.

After that bounce, EURJPY is now approaching an inflection point at the other side of this triangle.

Now of course this leads to a bit of confusion. Which is the dominant price pattern: is it the bearish head and shoulders and double top or is it the recently formed, bullish double bottom that’s going to guide prices going forward?

Well, the jury is still out but fortunately, we’re only a few hundred pips away from I think will be ultimate guidance as to which way EURJPY is going to go.

I’m leaning toward the bullish camp, though. That’s because the fact that EURJPY didn't continue lower is very telling. If something doesn't go lower than ultimately it's going higher. I’m getting the feeling that we may be seeing a major JPY paradigm shift and that the yen may be in a weakening cycle.

However, it hasn’t happened yet! I remain open to the fact that this could be a countertrend rally and that even if EURJPY breaks out above the triangle, it could fall back and resume its historical downward trend.

But I’m still more bullish than bearish.

Recently I’ve been loading up on EURJPY on the long side with two positions over the last couple of weeks. So I'm vested in this pair’s current momentum to the upside. However, I want to see what EURJPY does within the 128 – 130 price level before I can determine if this is just a short-term rally (and a profitable one) or the start of something even bigger.

Let’s look at the precious metals now, starting with XAGUSD (spot silver):

Silver recently broke out above a seven-year downtrend line.

This breakout was heralded by a bullish inverted head and shoulders price pattern and the result was an explosive move higher. However, the current volatility makes me cautious about future prices. For years and years, silver’s average weekly range was very, very small.

Yet in the last four weeks, it’s moved $4 - $5 in a week. This level of volatility indicates a lot of speculative fever and a lot of emotions flowing around in the silver market. This adds a lot of risk.

So even though I took a lot of money from my profitable silver trade recently, I’m happy to sit on the sidelines for now.

I’d like to see some consolidation in silver prices over the next few weeks. That would be healthy. Silver needs to consolidate in a certain area and build a support level before taking the next step higher. I don't want to be caught up in all of the emotion and speculative fever because it's very difficult to establish risk when silver moving the way it is right now.

Remember that there are two important components of every trade: where to enter your trade and how to ascertain and therefore manage your risk. In this case, it’s very difficult to determine risk to an acceptable level. So for now, I'm going to simply observe XAGUSD to see what develops.

I’ve been more active in the gold market, though.

Early last week I sent out an email to my Elite members where I suggested that XAUUSD (spot gold) was overbought and ready to drop thanks to certain price patterns and price action.

I was right, but unfortunately, I was very conservative on the take profit target. Nonetheless, we took a quick few hundred pips to the downside. As you can see in the email, I suggested selling gold at $2,037 and taking profit at $1,987.

Normally I don't try and play the opposite side of a huge trend, but gold was getting very overextended. Based on the weekly and the daily price action, I suggested a sell stop due to a key reversal bar and inside bar on the daily chart.

A bearish key reversal is where the market makes a new high but then closes on the low. An inside bar is when that bar’s high and low is completely contained within the previous bar. The former is bearish and the latter indicates a “coiling” of energy before the next explosive move down.

I was pretty conservative and didn't realize how big a drop gold would experience. However, there’s nothing wrong with taking a handsome profit when it’s on offer.

Since that move, my view on gold is the same as my view on silver. I’m watching the price action and looking to see if there will be a consolidation.

Gold is tracing out an ascending broadening formation at the moment and it's entirely possible that it could retreat back to the $1,800 level before finding another level of support. On the other hand, it did establish a bullish key reversal which might put a floor under the price and launch another rally.

So right now it's anybody's guess as to what’s next.  

Here’s the weekly chart for XAUUSD to give you a longer-term view of why I thought gold was ready for a drop:

Leading up to the last couple of weeks, the price of gold was very contained and controlled with small ranges. Then -- as with silver -- the last four weeks have been exactly the opposite with a $200 range in one week.

A 10% move in one week led me to the conclusion that XAUUSD was overbought and that it was likely to drop.

If gold is in a truly healthy bull market, we want to see consolidation, even consolidation that could last weeks before the yellow metal pushes up to new highs again. For now, I want to see the volatility contract and build a base for the next explosive move.

Let’s round off this week with a look at the NASDAQ stock index.

At first glance, this might look similar to XAUUSD.

However, there’s a key distinction between the price action of the NASDAQ and gold. The NASDAQ’s price action doesn’t suggest the same kind of shorting opportunity that we saw in gold as the volatility has been relatively constant throughout the current bull run.

We’re not seeing increased volatility the way we did with gold.

Add to that the fact that the NASDAQ has broken out of its ascending broadening price formation, and it looks like there's almost no turning back here.

So there's nothing about the NASDAQ’s price behavior that suggests we’ll see a collapse right now. The price momentum here remains biased upward until proven otherwise.

And that’s it for the week!

To summarize: I’m bullish on EURNZD and GBPNZD, leaning toward a weaker yen (and therefore bullish on JPY pairs including EURJPY), bearish on the US dollar, and on the sidelines for silver and gold for now.

I wish you a very healthy and prosperous trading week.

Mark "YenMomentumChange" Shawzin