Gold, AUD and NZD Getting Ready to Drop Even More
I hope you had a great Easter weekend and enjoyed the holiday immensely.
As for last week, the markets were largely contained within benign and small trading ranges as in prior weeks. It become so slow that USDJPY (the dollar against the Japanese yen) traded within a 40 pip range for the entire week.
Not surprisingly, the US Dollar Index (USDI) remains within a tightly coiled trading range.
Volatility has decreased even further than before, as you can see from the steadily smaller trading range.
However, while dollar correlated pairs are tightly constricted, I continue to believe the dollar will eventually break out to the upside. That’s based on the previous historical uptrend going back to 2015 plus the most recent uptrend prior to the current range-bound deadlock.
That’s why I’m bearish on AUDUSD (the Australian dollar against the U.S. dollar). We see a profound downtrend over five years in this pair.
One that’s been punctuated with an interim double top before resuming its descent.
Recently we’ve continued to see lower highs. Last week was a key reversal. I expect this will herald lower prices eventually.
Having said that don’t expect fireworks right away. I’m willing to stay short this pair for as long as it takes. There’s a very low risk of a significant bullish move in this pair, and I’m prepared to just wait it out until the overwhelming bearish trend resumes.
If you’re already short AUDUSD or looking to get short, be aware that in sluggish trading environments like this you should widen your stops and cut your trading size accordingly. That’s because it takes a long time for moves to occur and the market will often wander in the “wrong” direction out of pure randomness.
Also, never accept less than a 1:1.5 risk/reward ratio – that’s the absolute minimum. Normally I don’t like to go under 1:2 and strongly prefer 1:3.
This means that if you have a 50 pip stop loss, your profit target should be 75 – 150 pips. That’s 1.5 – 3 times the size of your risk, in other words. Don’t accept a target smaller than 1.5 times your risk or you’ll cut yourself out of winning trades too early.
Just hang in there and be patient with trades right now.
The same discussion applies to NZDUSD (the New Zealand dollar against its U.S. counterpart) too. Not just the patience, but also the direction.
As with AUDUSD, we see a long term downtrend here with a double top along the way.
Most recently, NZDUSD has carved out an ascending triangle which (as I wrote in earlier weeks) proved to be a continuation pattern of the earlier downtrend.
After NZDUSD broke the trendline, it’s continued to drop. I think this pair will head much lower over time.
Especially since the last week was an outside key reversal. That’s where the price made a temporary new high over the previous week and then closed much lower than the previous week’s low. That’s very bearish.
For NZDUSD, the first support area is at 0.66 and I expect it to head even lower over time.
We’re at an interesting inflection point right now with USDJPY (the dollar against the Japanese yen).
While I feel USD should outperform most other currencies over the next while, USDJPY is the exception as this pair looks vulnerable to a bearish move.
The current price action is like a single-page in a long-running novel. War and Peace, perhaps?
But to reiterate my long-term stance, I’m bearish on USDJPY due to the head and shoulders with a double top, followed by the descending triangle.
Both bearish patterns point in the ultimate direction this pair wants to take.
Most recently, USDJPY is forming an emerging double top. You can see how compressed the trading range was last week in this pair (just 40 pips over the whole week).
That created an inside bar for the week. Remember that inside bars represent a coiling of energy and sooner or later the energy will be released explosively … most likely on the downside due to the recurring bearish themes.
I certainly can’t promise that USDJPY will descend sharply next week, but it’s looking increasingly likely to drop as time passes. This is an incredible risk-reward opportunity if you’re (here’s that word again) patient.
Now for the precious metals, starting with XAGUSD (spot silver).
Looking back a dozen years, the silver market isn’t bullish at all and has completely failed to recover from the double top it formed back in 2011-2012.
Note that each bar on the above chart represents an entire month!
Beginning in late 2017, silver began forming a long-term descending triangle. It should re-test the support line of the triangle at 14 as it drifts lower over time. Sorry silver bulls, but that’s what the long term chart shows right now: no bullish prospects in the near future for the moon metal.
Gold is likely to be dragged down with silver, as we see from this monthly chart:
Note that gold (XAUUSD) is moving back inside the long term symmetrical triangle after its false breakout a few months back.
Once gold truly does retreat inside this long term pattern we’ll likely re-test the lower trendline. We might even re-test the 1000 price level before the downtrend is over.
Still not ready to believe it?
Then let’s take a look at XAUUSD on a weekly basis.
Here we see a recent double top that’s formed at previous long-term resistance. Gold has been unable to break this level for a very long time.
Moreover, XAUUSD suffered a key reversal in the most recent week, one long and strong enough to break the neckline on that double top. That should be enough to set gold on a very bearish trajectory.
That’s why I’m currently short XAUUSD from 1311 and 1285. My near term target is the 1200 level, and if we take out that level, then watch out below.
Meanwhile US stock indices continued a march in the opposite direction. They’re moving toward their respective all-time high peak trading levels. As an example, the NASDAQ100 appears poised to reach a new high at the 7800 price level in the near-term.
Don’t expect high volatility or a bullish surge once that happens though.
The market is most likely to make minor new highs and then drift sideways for the foreseeable future. Summer months are typically ‘doldrum months’ for stocks and I expect this summer to be no different, especially considering the already torpid trading activity we’ve been seeing.
Right now there’s only one stock I’m recommending as a buy: Facebook (FB).
I particularly favor the price action in this stock with the bullish double bottom setting a foundation for ever increasing progress to the upside.
I’ve been bullish on FB ever since it broke out above the neckline of its double bottom. It’s since traced out a symmetrical reverse triangle which is a continuation pattern thanks to the power of the double bottom.
I’m bullish for one more reason: last week the company was again exposed for abusing user data for their own benefit. This should have been very bearish for the stock price but instead it held its ground and clung to the top edge of the triangle.
I expect FB to go to 200 or better, perhaps even to new highs above 215 as it marches higher in the weeks and months to come. It’s a classic example of how strong price patterns (in this case a double bottom) foretell strong price action.
I only wish there were more examples in this very slow trading environment!
With that in mind, I wish you a very healthy and prosperous trading week.
Mark “USDJPYNarrowRange” Shawzin