Revealed: My Two Highest Conviction Trades Right Now
This week I want to show you what I think will be formidable trading opportunities in the very near future. I also want to unpack some of my thought processes about these trades and trading in general.
That means this is going to be a nuanced discussion, in no small part because the markets are so dynamic and fluid right now.
I think we can all agree the market throws a lot of patterns and trends at us. That means we have to sort out the worthwhile price action from the distractions.
So let’s start by looking at the USDJPY (the US dollar versus the Japanese yen):
For the last several years, you've heard me drone on about all the bear patterns in USDJPY.
And on the back of that bearish stance, I've made a fortune shorting this pair. The bearish patterns started all the way back in 2015 with the double top at the 126 price area.
That double top formed the head of a head and shoulders pattern. USDJPY was trending up until that pattern formed, and ever since then it’s trended down – thus confirming its reputation as a reversal pattern.
That long-term downtrend includes has remained within the confines of a descending triangle price pattern. A descending triangle is characterized by lower highs and a common low, with USDJPY’s common low at 104.
That level has held every time except during the pandemic-oriented hysteria in March. In fact, it’s held twice more since then with some bullish key reversals. (Remember that a bullish key reversal is when the price makes a new low and then closes at or near the high.)
All this long-term bearishness is partially offset by some recent bullishness, so there’s a lot of things going on with respect to USDJPY. This is why I try to think through certain strategies based on what I'm seeing in the market.
When analysing any currency pair, I start with a central premise. With USDJPY, that’s the governing price pattern in the form of that double top/head and shoulders that’s dictated a bearish behavior ever since.
How is that premise supported? By the price action in general and reinforcing patterns such as the descending triangle and a subsequent double top/head & shoulders pattern that’s formed within the triangle.
However, USDJPY is at a cusp right now – it’s about to reveal where it wants to go.
USDJPY is at what I call the MOT (Moment of Truth).
That’s because despite all the evidence it should go lower, I feel there's a trap coming up here. USDJPY should go lower. Instead it’s at a MOT right now.
Those twin key reversals are rather ominous. Then last week USDJPY also put in a very narrow range bar which was almost an inside bar. Whenever one of these tiny inside or narrow range bars appears, it represents a suppression of energy.
This energy always has to be released eventually. Just look at USDJPY’s history to see where the price has exploded after putting in one or more narrow range bars.
But which way this time?
If the market takes out a new low, this would be a fertile area to get short because you would expect a follow-through. However, those key reversals project that prices are going up. USDJPY might cut through the lows, get everybody excited that it’s going down, and then rocket the other way.
I’m keeping an eye on the most recent downtrend line -- any incursion above this line could open up something else other than the very bearish scenario I feel is most likely to happen.
Ultimately the market is going to tell me what it wants to do, of course.
But the number of possible scenarios here is pushing me to the sidelines. I’m going to watch how the market actually plays out. Let’s see what USDJPY does (as opposed to what I want it to do, which is drop decisively) and then we’ll jump one whatever trade opportunity is on offer.
In fact, there’s now so much ambivalence and ambiguity about USDJPY in my mind that I now feel there’s a better way to play the next yen move.
We can look at GBPJPY (the British pound versus the yen) to see if it offers any clearer guidance going forward.
GBPJPY is looking very interesting because I could make the case for either a bearish or bullish scenario here.
Let's begin by looking at it in a conventional way where I've made a lot of money shorting it.
Just like the USDJPY, the main premise is the bearish double top as part of a head and shoulders price pattern. Once GBPJPY cut through the neckline at 175 this gave the green light to a $50,000 move for every $1,000 dollars you risked on the short side. (That’s the value of these patterns -- they often indicate the next major move of the market.)
That pattern has remained the governing price pattern for five years.
Now I'm trying to figure out if it’s going to be broken by virtue of new patterns, or if it’s ultimately going back in the direction of the primary trend (lower).
In the last few years GBPJPY has formed a bearish rounding top. Within that structure is a complex head and shoulders (that’s a head flanked by multiple shoulders on each side).
But despite these bearish formations, prices have started to grab a foothold at 125. In the most recent timeframe, GBPJPY has even been establishing an uptrend with higher lows.
That type of trending behavior is inconsistent with a bear market. After all bear markets feature lower highs and lower lows, yet GBPJPY isn’t following the script.
It recently hit a support area along that trendline. Is this just a trap or are we going to get further momentum to the upside?
By and large I tend to go with the bigger trend because that’s where the most money is to be found in trading.
That’s not to say that I haven't also done countertrend plays to ride a nice bounce.
But the question remains: is this trend still in place? Or are we at the cusp of a paradigm shift where GBPJPY is building toward a significant upward move? That's why I feel the yen pairs in general are at a Moment of Truth.
If we get it right, we can make a lot of money.
Let me digress for a moment and state that I make most of my money on very few BIG trades. If I look back over the last two years, I could say that I have made my biggest profits in just half a dozen trades.
As you can imagine, these don't show up all the time. So when I see something line up, I tend to focus on it like a laser beam.
GBPJPY (the British pound versus the Japanese yen) and also GBPNZD (the British pound versus the New Zealand dollar) are my key areas of focus right now – more on GBPNZD shortly.
The key point is that when I focus on what looks to be a BIG trade, I will trade that market a little bit differently by trying to build a large position for a very large win.
Of course, I'm fully cognizant of the fact that a potential reversal in GBPJPY from bearish to bullish is going to be highly volatile. (Full disclosure: we lost on a couple trades trying to get long GBPJPY last week.)
So let me show you what I'm thinking here on the daily chart.
The double top at 146 looks fairly formidable and should have dictated prices going forward. But after it fell, we saw only higher lows and higher highs in GBPJPY. That’s not consistent with a double top.
Here’s what stands out for me: prior to the double top (which is now questionable) GBPJPY put in a formidable double bottom at 126. After the double-top-that-wasn’t, GBPJPY made a larger but more asymmetrical double bottom (the large one I marked with a big W).
The most recent price action looks even more bullish. There were a pair of bullish key reversals in the last week, especially Friday's major key reversal. Plus GBPJPY is also thrusting through the neckline of that major double bottom.
This strongly suggests that the next move is going to be higher. I believe we’ll see a move to 142 if not more.
However, getting this right during lots of volatility can be tricky. Two weeks ago I sent out an email to Elite members to get long at 134.67 on a break above what proved to be the left shoulder of an inverted head and shoulders pattern.
I hypothesized that GBPJPY was now going to smoke to the upside and I haven’t changed my mind. But unfortunately, the first couple trades got stopped out as the market took a further dip and completed what’s now a bullish inverted head and shoulders.
This is why I have misgivings about sharing some of my trading notions. It’s hard to have the responsibility of putting out trades and watching people lose.
However, I think we’ve now seen “the big reveal” with an inverted head and shoulders. That bullish pattern is backed by the bullish key reversals in the right shoulder over the last week.
That’s why I feel this market is primed to go. I think a lot of the risk was taken out by virtue of those reversals last week.
Just like you an insurance company, those bullish key reversals offer you protection and reduce the risk on the long side in this trade. Sometimes there's a price to pay for that protection -- the market may still come off here. But I think 135 is going to hold.
That’s why I’d buy any dips if we see them. Despite any losses on earlier trades, if you make 800+ pips on the next trade it will take care of business.
And that's really how I approach the market. I don't look at each trade and worry about past losses. Instead I look for one or two big trades that are going to really put me in the winning column.
Anyway, long story short: I want to build a large long position in GBPJPY. When it goes to 142 (and hopefully higher) I’ll have a big smile on my face and a big fat balance in my account.
Now let’s take a look at GBPNZD (the British pound versus New Zealand dollar):
The early double bottom price pattern at 1.67 and then the round rounding bottom soon after that have been the governing patterns here.
Note the key reversals at each of the bottoms along the way. The market has kept climbing higher in fits and starts despite periodic sharp declines.
I’m also bullish for two more reasons: GBPNZD seems to have made another double bottom just now. What’s more, every time this pair has come down to the uptrend line, it’s held and bounced from there. So I think we’re staring at the face of a major opportunity where prices should explode to the upside.
It's fully possible that GBPNZD takes out the low before rocketing higher. This is definitely a volatile pair and not for the faint-hearted.
But even if you game out all the various scenarios, on balance the evidence points to the upside in GBPNZD.
Now let’s look at XAUUSD (spot gold):
Gold formed a beautiful symmetrical triangle over several weeks. I felt the market would go lower and break out of that symmetrical triangle, which it did. I made a whole bunch of money on the downside.
Since then gold has dug in and established a rather subtle double bottom at the $1,850 low. However, I think this rally ultimately is going to peter out and the next major move will be lower once again.
The high point is likely to be the breakout area of the symmetrical triangle (what I’ve labelled as resistance on the chart above).
So I wouldn’t chase gold to the upside. Instead I’m looking for a bearish key reversal or similar sign to go short once again. If gold drops under $1,850, I think it will fall all the way to $1,750.
Obviously if prices behave differently, then I'll act accordingly.
Now let’s look at the NASDAQ, the tech stock index within the United States:
The NASDAQ broke out to the upside of an ascending broadening formation several weeks ago.
However, the index now faces substantial headwinds, starting with a major bearish key reversal which is one of the longest bars since the March lows. The bigger the range, the more substantial the implications.
That’s not to say the market can't creep up to retest that level. However, I think we’ve seen the top for now.
On the bullish side, there was a bullish key reversal last week which looks like it could contain the price on the downside. Taken together, these two opposing key reversals should establish some kind of trading range going forward, one likely to feature plenty of volatility.
And that’s it for the week!
I’m very bullish on GBPJPY and GBPNZD. I’m bearish on XAUUSD. I covered fewer pairs than normal because I wanted to do more of a deep dive on how to think about BIG trades that offer once-a-year opportunities.
So I hope this report was helpful. It was a little bit different. But I think it’s important to try and grapple with my thought processes while the markets are so dynamic and fluid. I hope it helps you better understand how I approach trading for the biggest and safest gains.
I wish you a very healthy and prosperous trading week.
Mark "GBPJPYAllIn" Shawzin