Is This “Sleeping Giant” About to Wake Up? The Biggest Trade on the Board Right Now
Last week I discussed the concept of busted chart patterns and I’m going to expand upon that idea in this week’s report before looking at certain other pairs and patterns.
That’s because busted patterns are developing right now that I feel you need to know about as trader.
Earlier this year, we saw a number of moves coinciding with the price action during the initial pandemic panic. During a period of high volatility, prices thrust to all kinds of new highs and new lows. Now we're left to interpret where things are going from here.
To start with, here’s NZDCAD (the New Zealand dollar versus the Canadian dollar):
Looking at this on a conventional basis, this chart has all the classic interpretations of a very bearish market beginning with an Adam and Eve double top, so-called because one top is a single spike to a new high and then the other top is a more rounded top with multiple highs.
That double top is a reversal price pattern that indicates that prices are headed lower. NZDCAD has also traced out a complex head and shoulders, so-called because there are several shoulders on each side of the double top “head”. A huge pattern like this created a major neckline.
Once NZDCAD broke that long neckline, conventional price pattern wisdom says prices should have dropped much lower. (For reference, look at how prices dropped after the double top.)
Yet we saw exactly the opposite.
Prices spiked down and then up again before climbing steadily ever since. This price action created a bear trap at that neckline and it’s a strong indication of what I call a busted price pattern.
A busted pattern is when price action fails to agree with the preceding patterns.
NZDCAD should have gone lower due to all the preceding bearish price action, but it didn’t. A failure like this is important.
And it’s a timely reminder of why you have to be flexible when interpreting charts. I draw my structure and then watch where the market goes.
To my mind, what doesn’t go down has to go up. NZDCAD failed to drop as expected. So I think NZDCAD’s future trajectory is to the upside.
I said so a couple of weeks ago to my Elite members when I suggested we get long at a price level of 88.11. So far, NZDCAD has incrementally moved higher.
But NZDCAD isn’t the only example.
As with the NZDCAD, AUDCAD (the Australian dollar versus the Canadian dollar) is exhibiting the same busted pattern behavior were prior to the break below the neckline, there were some very bearish patterns.
AUDCAD traced out a series of bearish topping patterns over the last several years, indicating that the price had to go lower.
It did indeed plummet once it broke the neckline, but that was then and this is now. It appears those bearish price patterns are played out. Today the market is indicating it wants to travel in the other direction.
Not only has AUDCAD thrust above the neckline that was controlling prices for many, many years, it’s also formed an inverted head and shoulders price pattern with a sloping neckline.
So it looks like AUDCAD is not only going higher but higher very quickly. That’s because a sloping neckline points to faster price movement than a flat one. Here the right shoulder is sitting above the left shoulder to create a sloping neckline. This is very bullish.
This is why I love price patterns and price action because you can apply this analysis to almost any trading instrument, not just FX pairs.
By way of example, here’s XAGUSD (spot silver). There's an eerie similarity between the price action in AUDCAD and XAGUSD.
Silver has stayed within the confines of a bearish descending triangle for several years now. That triangle has been defined by a series of lower highs.
But recently, silver prices are creeping back to the trendline that defines the triangle.
It’s been a long wait for silver to progress to this point. The bearishness has been relentless, including repeated weak bounces off the neckline at $14. Such bounces strongly suggested that this level had to be taken out. (The neckline of a bearish pattern isn’t a bottom because it gets tested many times until the price breaks down.)
When the neckline broke, silver prices plunged from $14 to under $12, but that didn’t last long. Silver bounced sharply back into the triangle and now look poised to bust out the upper side.
Once there’s a breakout, that busts the bearish descending triangle pattern.
The key price levels silver has to overcome are $19.60 and then $21.15. So there are still a couple of dollars to go before the triangle is truly busted, but once that $21 resistance is taken out then there’s nothing but blue sky ahead for XAGUSD.
Just like with AUDCAD, there’s an inverted head and shoulders forming. This is a bullish price pattern. Right now silver is trading right at the neckline and also right at the major primary secular downtrend line that’s been controlling prices for many, many years.
Silver will soar if it can get through the next couple of dollars of heavy resistance.
Now let’s take a look at the USDI (the US Dollar Index) which tracks the US dollar against half a dozen of the most liquid major currencies around the world.
We see the same kind of blow-off behavior that we saw in the other instruments, just on the opposite side. Whereas the previous instruments I’ve discussed made new lows before rebounding in the other direction, USDI thrust above its old highs and is now retracing significantly.
That suggests there’s a bull trap in USDI where all the dollar bulls who were chasing new high prices have now been trapped. Not only are prices moving down, I think they’ll keep going.
There’s even a bit of a head and shoulders forming here, and USDI is hanging around its last vestige of support. The dollar is poised to drop soon.
So which pairs are the best bets to take advantage of this?
I think NZDUSD (the New Zealand dollar versus the US dollar) is very promising and of course, there’s my ‘slam dunk’ pair too, which is USDJPY (the dollar versus the Japanese yen).
Let’s examine NZDUSD first:
NZDUSD has been in a long-term downtrend that included a double top along the way to arrest an earlier attempted rally. That downtrend resulted in two major neckline breaches on the way down.
And with the pandemic, we saw the same action as with NZDCAD, AUDCAD, and XAGUSD: prices dropped in accordance with the bearish patterns, but then reversed sharply.
NZDUSD has now broken the first of two major necklines and is close to challenging the second one. It also formed a bullish inverted head and shoulders as it did so.
That suggests the final confirmation of a new bullish trend in NZDUSD will be a breach above the next neckline. There will probably be some resistance here but once that level is taken out, NZDUSD should have a very bullish future ahead of it.
Therefore any dip in NZDUSD is a buying opportunity ahead of future gains.
This next pair does not represent a busted pattern at all, but it’s the one no-brainer currency pair to benefit from a lower US dollar. That’s USDJPY (the dollar versus the Japanese yen):
USDJPY is at the very mature end of its descending triangle right now. There’s not much room left before it indicates which direction it’s going to break out.
But to me, there's only one direction this can go and that’s down, thanks to the historical head and shoulders with a double top. Plus and a more recent (and emerging) head and shoulders with a double top. Plus the descending triangle itself.
The historical head and shoulders remains the governing price pattern that determines price action going forwards. There are no busted price patterns here at all.
I think USDJPY will test the 104 trading area and then ultimately go lower to parity (100) and then perhaps below that too. However, the pair could trade the rest of the summer in the back and forth trading behavior it’s shown for the last eight weeks.
Despite the lack of decisive price action, I’ve kept my short positions and I'm willing to keep holding them even if USDJPY creeps higher. In fact, I’d look to short more as I feel the USDJPY price action is overwhelmingly bearish.
Considering all the busted patterns I’ve reviewed earlier, you might be wondering if USDJPY will bust all its bearish patterns by making a sharp low before rebounding. I think that’s unlikely. And even if it does happen, then this pair still has to go lower – even much lower – before it goes up to bust the patterns.
Just be patient here on the short side and I believe we’ll ultimately be rewarded.
Now let’s take a look at precious metals again.
Earlier I presented my thoughts on XAGUSD (spot silver) where it appears silver is poised to break out from long-term bearish price patterns and rise strongly.
This has interesting implications for the gold/silver ratio, which is simply the price of gold divided by the price of silver. Here’s a one-year chart of that ratio:
Right now the ratio is about 97. That means gold is worth 97 times more than silver. Recently, the ratio rose as high as 125 and formed a bearish double top before reaching its current level which is still well above historical averages.
That suggests the gold/silver ratio is going to keep contracting as it reverts to the mean.
There are two main possibilities here:
- gold is going to go down much faster than silver or
- silver is going to go up much faster than gold.
I think we’ll see the latter. I believe silver will begin to outpace gold in the near future.
Again, this is the value of taking the time to observe price patterns and price action. We can give ourselves an edge in virtually every trading instrument, even a ratio like this one.
Now let’s see how XAUUSD (spot gold) looks and if it supports this idea.
Gold is currently bumping up against multi-year highs at the $1,800 level we last saw back in 2011.
The price is now right at the apex of a reverse triangle too. I’m not saying that gold can’t go higher here. It just feels like silver will go higher faster. So that's where I’m placing my bets right now.
Look at silver first.
Now let’s round out this week with a quick look at the US stock markets …
In this chart, I'm looking at the NASDAQ which measures the tech-stock sector within the United States:
The NASDAQ has thrust through all kinds of barriers that have been controlling price behavior and just printed above the ascending broadening price pattern.
So the January highs have been exceeded, which is very bullish.
What isn’t bullish is that the new highs are confined solely to this index. The S&P500 and the Dow have not followed suit. That means there’s non-confirmation of US stock market bullishness here.
Added to that is the expanded volatility we’ve been seeing. When volatility starts expanding, that often marks a peak in the market. So I don't think this bullish NASDAQ behavior can continue much longer.
Although the path of least resistance still seems higher (at least for now), I would be on the lookout for any kind of daily reversal that indicates the NASDAQ has had enough.
For comparison, here’s the S&P500:
In contrast with the NASDAQ, prices have been rallying but are nowhere near the old highs.
It’s the same situation for the Dow Jones Industrials (DJIA) which have traded within the confines of a symmetrical reverse triangle.
Since this pattern is also known as a megaphone top, this suggests the DJIA could be tracing out a topping pattern. We'll have to wait and see, however.
Because as I’ve shown you, markets can bust through patterns and invalidate earlier price action when you least expect it. This megaphone top is a bearish price pattern, but if the market shows us something else, this triangle will serve as a continuation pattern instead.
One other point to note here is the key reversal from a couple of weeks ago. The DJIA has made continuously lower highs since then. That suggests the high of the key reversal could act as a future resistance level in the near future.
So I would not get carried away in this stock bull market for now. If you missed it, you may want to stand aside and see how price action plays out from here. There will likely be better opportunities to go long.
And that’s it for this week!
To summarize, I’m bearish on the USD and USDJPY. I’m bullish on silver and NZDUSD. And I think there’s a lot upside in other ‘busted pattern’ pairs such as NZDCAD and AUDCAD. I’m neutral on gold and the U.S. stock market indexes right now.
I wish you a very healthy and prosperous trading week.
Mark "SilverBullet" Shawzin