Gold’s Going Down Plus My Best FX Trade Prospects This Week
There’s still some US election controversy stirring. There’s also a rising number of coronavirus cases globally with many countries in semi or total lockdown.
But to us pattern traders it doesn’t matter a whit. Why?
Because price is the only thing that matters. We understand that the market is a discounting mechanism. That’s because markets project where things will eventually pan out -- they’re ahead of events and the news.
And that’s why we only look at price action. It tells us everything we need to know about the direction of markets going forward.
Let’s start with a look at the USDI (US Dollar Index) which measures the dollar against a half dozen of the most liquid currencies.
USDI maxed out at the height of the pandemic in March. It thrust new highs as everybody fled to security. This created a huge bull trap, meaning that anybody who chased prices higher became trapped as prices turned south.
By now looks like the dollar is going lower and probably much lower over the course of time.
USDI has established a bearish head and shoulders price pattern. This is a reversal pattern and has ended the previous uptrend.
That being said, we’re at a key support level right now and it's an open question as to whether USDI can continue to churn at current prices a bit longer. (Ultimately, there's very little doubt in my mind that USDI is heading lower over the long term.)
You should be positioned accordingly. Even if USDI does have these little bounces, they should be viewed as temporary rallies within the trajectory of a longer term bear market.
Now here’s GBPUSD (the British pound versus the US dollar):
If expectations are for the dollar to go lower over time, it follows that GBPUSD should go higher.
In support of this idea, GBPUSD has formed what looks like an Eve and Adam double bottom, so called because the Eve bottom has multiple prongs and a rounded shape while the Adam bottom is much spikier with only a single prong.
This represents some formidable base building to herald a turnaround of a 10-year downtrend.
Since then, GBPUSD has been hugging a trend line as it climbs toward support at a resistance area to form a coil of inside bars.
One inside bar represents stored energy to be released later, and two or more in a row become a coil with a much larger reserve of stored energy.
As to which direction that energy will be released, refer to the preceding pattern or trend. The Eve and Adam double bottom suggests this coil will unwind to the upside.
For comparison, here’s NZDUSD (the New Zealand dollar versus the US dollar):
For the last 10 years, this pair has also been in a profound downtrend. But recently, prices have begun to bottom and move up.
NZDUSD has formed an inverted head and shoulders, which is the bullish, upside down version of what we saw in USDI.
This too is a reversal price pattern. Where it differs from a more normal inverted head and shoulders is the slope of the neckline: the right shoulder is higher than the left shoulder.
This is a green light for prices to go higher and this is one of the currencies you should be long.
You can start building a small position at or near current levels and look for any pullbacks (if they occur) to add for the long term. Even if NZDUSD drops to 0.66, I wouldn’t be worried about the bigger uptrend on the way.
Remember that once markets pick a direction, they keep going in that direction for quite some time. So if you think you've missed the party here in NZDUSD, I don’t agree. This pair still has a long way to run.
Here’s USDJPY (the US dollar versus the Japanese yen):
Again, if the expectation is that the dollar is going to go lower over time, then USDJPY should move accordingly. Down, in this case.
The number of bear patterns on this chart strongly support my case, including the double top that became the head of a head and shoulders pattern all the way back in 2015. That head and shoulders remains the governing pattern as it’s set in motion a profound downtrend from 126 all the way down to 104. That downtrend isn’t over yet, despite the tremendous amount of volatility and sideways trading we’ve seen in recent years.
That pattern has since been reinforced by the long-term descending triangle we see now. This triangle is defined by lower highs over a common low. It’s just a matter of time before prices break through.
I can't see USDJPY staying above 100 long term. So long-term players should be staying short and adding to their positions on any rallies.
Now I want to talk a bit about an often-overlooked chart that’s showing some interesting price action. Here’s GBPCHF (the British pound versus the Swiss franc):
This is a monthly chart where each of these bars represents one month in time. GBPCHF has been falling off dramatically from 2.50 to about 1.21. Typically, it’s proven wisdom that you don't fight the trend. “The trend is your friend” as the old saying goes.
But there may be something emerging here because of the coil off the bottom.
Prices are hovering above the support line here and GBPCHF is challenging its recent monthly highs. This suggests we might see a pop to a higher level. On a risk/reward basis, it may be worth looking at. (I've taken worse trades than this and gotten a nice payout in the past.)
So let’s look at GBPCHF on a shorter timeframe, weekly this time:
Again, this has been in a profound downtrend and typically you shouldn’t fight the trend, but trends do end.
That’s what could be about to happen in GBPCHF with the March/April lows forming what looks like a bear trap.
The rounding bottom here is bullish and there’s even an inside bar most recently. That suggests there’s plenty of unreleased energy building up.
That’s why I would place a buy stop somewhere above the recent highs. What I like about this trade is that even if we're wrong, we don't have to risk a lot to find out. There’s a good risk/reward trade here.
Another fertile opportunity, in the coming days, weeks and months should be in Japanese yen correlated trading pairs.
Here I’m looking at EURJPY (the Euro versus the Japanese yen):
Whenever a chart looks ambiguous, the way forward is to determine the governing or dictating price patterns that have governed price action the most.
In this case, the head and shoulders at the left of the chart fills that role.
Since then, EURJPY has traced out first one and then another double top, with the second double top forming at the neckline of the first one.
EURJPY looks like it’s headed lower despite the somewhat sideways overall price movement. I’m not sure if it’s ready to move right away or slide sideways for awhile longer, but this pair is worth keeping an eye on for future opportunities.
The same could be said for GBPJPY (the British pound versus the Japanese yen):
This pair has been hugging an ascending trendline within a symmetrical triangle, but this looks like a short-term uptrend in a long-term bear market that began with a double top as part of an overall head and shoulders (just like USDJPY).
GBPJPY has also established a rounding top, which leads me to expect that eventually prices will round the corner and go lower. But in the meantime, GBPJPY is hugging the ascending trend line.
For now, all we can do is draw some structures around the price and then wait to see what the market does. Instead of spending all your time trying to guess where GBPJPY going to break, it makes a lot more sense to just wait for an opportunity when it shows itself.
I don't think we’ll have to wait too long before we discover which way this pair will break. For now, my assumption is that GBPJPY will break to the downside (given the structures in place), but that's a very subjective evaluation and the market doesn’t care what I think.
For now, I’ll wait and see what the market does. Then I’ll react when the market gives me a tradeable setup.
Drawing structures and determining the governing pattern is exactly the same kind of analysis that I’ve used in all my trading, including GBPNZD (the British pound versus New Zealand dollar):
In this pair, I observed that a double bottom was the governing pattern. Prices rose from 1.165 to 2.18 after breaking the neckline of that pattern. That’s how GBPNZD went from a downtrend to an uptrend.
So we had a pattern that appeared and it ruled the market for four or five years. Now we have another pattern appearing in the form of a bearish head and shoulders. Is GBPNZD headed down?
Right now, my feeling is that this head and shoulders is going to be a fake out and the uptrend should resume at some point. I think GBPNZD will find price support somewhere between the 1.90 and 1.85 area.
I feel this pair still looks more bullish than bearish. But for now, we’ll have to see how things transpire.
Last week I spent a lot of time examining NZDCAD (New Zealand dollar versus Canadian dollar).
There's a lot of things going on in this pair, primarily a busted complex head and shoulders that should lead to explosive gains to the upside over time.
By “busted”, I mean that the implications of the long-term price pattern are no longer in effect. The bearish stance implied by a long-term double top flanked by multiple shoulders on each side (making a complex head and shoulders pattern overall) appears to be finished.
That’s because this market isn’t going where it should have gone: lower. Instead it's going the other way.
The long-term bearish price pattern has now been replaced by a bullish double bottom.
What’s more, NZDCAD cracked through the neckline of that double bottom a few weeks ago and has been carving through successive levels of resistance ever since.
Unfortunately, I tried to play it too cute with my order last week. I recommended buying NZDCAD with a limit order which didn’t get triggered. This is why I typically don't suggest or do limit orders.
It's very difficult to predict where prices are going to drop before turning around. Instead I like to enter on momentum with a stop order for best results. I should have done that last week, but I didn’t.
So I think that you shouldn't play it too cute in this pair, and just buy it anywhere at the market while keeping your stops very wide. Give this pair room to go wherever it's going to go.
By virtue of busting the complex head and shoulders pattern, we could get a monster surprise to the upside in NZDCAD much quicker than anticipated.
Now I'm going to take a look at the precious metals trading pairs.
Let’s start with XAGUSD (spot silver).
Frankly I'm somewhat mystified about where we’re going in this chart. Some weeks ago, silver broke out of an inverted head and shoulders which coincidentally ended a seven year downtrend too.
This gave rise to a huge short-covering rally. Now I'm questioning if it was just that … or if there’s going to be something more sustainable over time in this market.
Right now silver isn’t giving us an answer. It’s churning around in a consolidation range between the bottom and the top of the original breakout. There’s been an inside bar and therefore a buildup of contained energy ready to be released one way or another.
I feel that silver could retest the breakout area at the $19-$20 area but I could be completely wrong about that. So right now I’m on the sidelines with silver.
XAUUSD (spot gold) is a bit different and I have a much stronger opinion here:
Spot gold has also been consolidating after a long-term breakout. The question is whether the descending triangle we see is just a continuation pattern or a reversal pattern instead?
More and more I feel that triangle will prove to be a reversal pattern.
That’s because we saw a breakout to the upside, but it’s been merely a head fake and a bull trap. The bulls were trapped when gold had the biggest decline in six years as it dropped about $110 in a day.
One of the levels I've been looking at is a retest of the $1,750 area, which is the original breakout level.
Whenever you get a breakout, there’s often a retest of that breakout before the next leg of the overall trend. I suspect that’s going to be the case for gold.
The yellow metal could dance around between $1,850 and $1,900 of course. But the next time it drops below $1,850 it's likely to be a significant drop.
Now here’s the daily chart of XAUUSD for a deeper look:
You can see the triangle and the false breakout more clearly here, and this chart looks quite bearish.
I think gold will spiral out of the triangle to the downside, for the very simple reason that the price has bounced off $1,850 so many times that it can’t be a genuine bottom. A “real” price bottom will never give you so many chances to get in.
Therefore this apparent bottom will get broken before the “real” bottom appears lower down.
Once the doors get kicked in, we’ll see lower prices very quickly.
Now here’s the NASDAQ stock index in the United States:
The NASDAQ broke out of an ascending broadening price pattern some time ago, and since then has been hovering above its breakout area. The path of least resistance is higher, even quite a bit higher, but one thing is troubling me.
There’s a lot of volatility in this market right now with very wide ranges on the weekly bars. Once you get this extreme volatility, it suggests a retail (or speculative) mentality which never ends well.
However, when that time comes is impossible to know right now. And in the meantime, there appears to be a double bottom forming on top of the ascending broadening formation -- so the path of least resistance is higher.
There’s an inside bar on this chart now. That coiled energy could be released to the upside (most likely) but even an apparently innocent inside bar can also become a very nasty reversal.
So I'm going to keep my eyes peeled for what develops here. There could be a great trade on the way, but not one that checks all the boxes for me … yet.
Remember, the secret is to identify the governing pattern by drawing structures over the price, examining price action to see if it conforms with those structures, and setting your trades accordingly. Always know your risk/reward on any given trade. Stay calm and analyze rationally so you’re ready for the great risk/reward trades when they come.
And that’s it for the week!
In summary, I’m bullish on GBPUSD and NZDUSD and bearish on USDJPY. I’m neutral (but thinking about the bear side) on GBPJPY, EURJPY and also spot silver.
I’m definitely bearish on gold, and definitely bullish on NZDCAD.
And I’m in a ‘wait and see’ mode for the NASDAQ and GBPNZD right now too.
I wish you a very healthy and prosperous trading week.