So many trades … so much potential [Final Chance]
Last week I began my analysis with EURCHF (the Euro versus the Swiss franc) because I felt it was an ‘off the grid’ trade with an excellent risk/reward ratio.
Let’s look at that chart right now:
EURCHF has been in a profound downtrend for some time. What’s more, it's typically a very moribund pair and normally trades in a very tight trading range. That makes it unsuitable for the type of trade I normally seek out.
However, there’s a stealthy setup here which I first discussed last week.
People always say you can't pick tops or bottoms but quite frankly I consider that my strategic edge. I have an effective strategy for spotting trades as trends turn from one direction to the other.
So while EURCHF has been in a downtrend, right now there’s a favorable possibility we could get a nice spike to the upside. I really like the risk/reward here.
The evidence starts back in the April-May timeframe. EURCHF put in a subtle double bottom from which it bounced nicely before coming back down to test that pattern’s neckline.
Since then, it’s put in some very bullish price action with a pair of key reversals (that’s when the price made a new low and then closed on the high of the week). EURCHF did that twice in its most recent consolidation.
This combination of pattern and price action indicates where the most likely momentum is going to be. A double bottom price pattern in the rear view mirror and bullish price action ever since now strongly suggests future prices should be higher.
How much higher remains a bigger mystery. This potential move could just be a countertrend trade where it comes right back down into the trend later. Even so, that gives us a nice profit opportunity without having to risk too much to find out if we’re right or wrong.
That scenario is to me is the Holy Grail of trading.
Last week I suggested putting a buy stop in EURCHF at 1.0802. That order remained unfilled for most of the week.
But here’s the nice part: I didn’t have to watch the chart every day. I wasn’t stressing out over a
15-minute chart. I wasn't looking for some indicator to turn. I put in a low-risk buy stop order and went off to do other things with my time.
If EURCHF had kept going down, then my buy stop wouldn't have been triggered. No harm, no foul.
But on Thursday that order was finally triggered. By requiring the market to confirm my hypothesis, I got into the trade at the time and price that it's ready to “go”.
The risk remains small for potentially a nice upside. I'll do that trade all day long.
And it’s not too late to get aboard if you’re not long already. That’s because the characteristics and benefits of this trade remain the same as last week.
Let’s compare EURCHF with GBPCHF (the British pound versus the Swiss franc).
It's pretty much the same discussion as with EURCHF. GBPCHF has been an ugly downtrend.
People always say the trend is your friend, don't fight the trend and so on. Often, that’s the way to bet.
But I’m seeing a good risk/reward trade in GBPCHF on the long side here. During the pandemic, GBPCHF spiked below its long-term support line of multi-year lows. It spiked back up just as quickly, suggesting that price movement created a bear trap where anybody chasing those lows has since been trapped.
As with EURCHF, I think there’s a sneaky play to the upside because of recent price action. Specifically, I’m looking at the coil that’s currently forming. A coil is formed of inside bars which are entirely contained with the high and low of a longer, earlier bar.
Coils suggest a compression of energy that sooner or later releases in explosive fashion. I’m taking a bet that we're going to uncoil to the upside.
Again, what I like about this trade is that it's not going to take long to find out if I'm right. I also don't have to risk a whole lot. The potential reward looks very attractive. And so I'll do trades like that all day long.
Now of course the disadvantage of picking a bottom is that it could take a lot longer than you think to see your play happen — or you could just be wrong.
However, when you can keep your risk low while having a great shot at an upside bounce – a bounce perhaps as far as the trendline I’ve drawn on the chart — it’s worth betting on.
Now I want to look at a few more GBP pairs.
After all, the UK has been beset with another outbreak of COVID as well as enormous Brexit concerns. The pound has plummeted. Are there trading opportunities here?
Here’s GBPNZD (the British pound versus the New Zealand dollar):
This could be another great buying opportunity. That’s because when you look back at history, often the best plays are the ones that pop up when there's a crisis. Crises represent opportunities and right now I believe that being long GBPNZD presents just that opportunity.
Although this pair was crashing last week, I suggested the 1.90 price level was likely to hold in past emails to my Elite members. I felt the crash was likely a phenomenal buying opportunity. We started to get a sense of that last week when GBPNZD made a low right under 1.90 and then closed substantially higher.
That reversal (not coincidentally) took place right at the level of a previous reversal, suggesting we may be seeing an emerging double bottom.
This translates into an enormous opportunity because I believe GBPNZD is in a stealth uptrend. Look all the way back to late 2016 and early 2017 where it put in a double bottom price pattern that’s been dictating price action ever since. I call it a stealth bull market because there’s been heavy downturns along the way.
But in the main, GBPNZD has been traversing along a well-defined uptrend line. Every time it hit this line, it’s held. That’s why I think it will hold again.
In fact, this looks like the beginning of a beautiful story to the upside.
It’s why I put a buy stop slightly above last week's high. Wait for the momentum to put you in the trade. And if the trade fails, no harm no foul.
And that’s the beauty of my layered approach:
I look for a pattern.
I look for price action.
And then I compliment it with a resting or pending order to let the market confirm what we think we’re seeing.
This double bottom right at the 1.90 area will be confirmed upon a thrust above a neckline around 2.05.
But I'm not waiting for that confirmation. I've got long positions on already and I advised Elite traders to get in at 1.9235 earlier this week. Already we're sitting on a nice 200 pip buffer waiting for prices to rise what could be a lot higher in GBPNZD.
I think there’s still more to come in this pair.
Now I’ll take a shorter look at GBPAUD (the British pound versus the Australian dollar) for comparison purposes:
This shares many of the same characteristics as GBPNZD where all the way back in late 2016, early 2017 the pair established a triple bottom price pattern which has governed prices ever since.
You can see that every time GBPAUD tested the 1.75 line it held, including recent weeks. It now looks like GBPAUD is forming a what could be a meaningful double bottom. Final confirmation of this double bottom would be a breach above 1.84 – 1.85.
That would then open a threshold for much higher future prices in GBPAUD.
Now for some USD analysis ….
In this chart I'm looking at USDI (the US Dollar Index) which tracks the US dollar against half a dozen of the major currencies.
For the last several weeks I've been saying the dollar has likely peaked, but consistent with analysis in last week's report, you'll see I was projecting an upturn in the dollar this week.
That was primarily due to the key reversal pointing the way higher, plus some inside bars.
I suggested that USDI could retest the neckline of the bearish head and shoulders and that’s what we’ve seen. How far of a bullish incursion USDI will make is yet to be determined, but next week should see continued strength in USDI based on last week’s action.
My long-term view on the dollar is bearish. In the meantime this looks like a short-term counter-trend rally.
Of course, that US dollar price action means we’re seeing the mirror opposite in EURUSD (the Euro versus the US dollar):
A few weeks ago, I said current levels would likely represent a meaningful containment area and that we would see EURUSD likely drop and retest the 1.15 price level. The current resistance level can be seen as a mini head and shoulders pattern. Price has since dropped through the neckline there.
As it looks like the US dollar will continue to be somewhat stronger over the next week or two, that strongly suggests we’ll see lower EURUSD prices as a consequence.
The low could be the neckline of the inverted head and shoulders pattern, which is the breakout area marked by that particular bullish pattern.
I'm now looking for a retreat to somewhere under 1.14. Then let's see what happens.
Now here’s USDJPY (the US dollar versus the Japanese yen):
Consistent with the strength of the dollar last week, USDJPY made a new low right at the 104 support area and then closed at the high.
To my mind this looks nothing more than a dead cat bounce. That means I don't see this bullish reversal as leading to a sustainable rally. It’s just a bounce, and not likely to be a very strong one. The only notable point about it is that there have been earlier reversals in the same area.
The bigger point to grasp here is that USDJPY continues to make a pattern of lower highs. If this was to be a meaningful reversal, I would look for price action to start taking out the neckline defined by recent highs. That means I would look for a thrust above 107 as something that would suggest a meaningful rally.
But because of the long-term bear price patterns in USDJPY, I don't think any such rallies are likely or sustainable.
What happens next week is an open question. Does USDJPY get a bounce off the reversal or is this as high as it manages to rise within the cadence of a bear market?
Ultimately, I expect the 104 area to be taken out. After all, once you hit a support area so many times, it's just a matter of when, not if, it gets broken.
That’s why I would look at any meaningful bounces in USDJPY as a means to short it.
But this may take some time. So next week's price action is going to be pretty interesting as it unfolds.
The EURJPY (Euro versus the Japanese yen) chart was one where a couple of weeks ago I was debating whether there was a double bottom price pattern there or not. Something that could generate a sustainable rally … or not.
I believe this newest ‘double bottom’ has failed and failed much sooner than the similar looking double bottom in the past. That older pattern could have been traded for a nice ride up but ultimately it went back into the main downtrend.
The governing price patterns in EURJJPY remain the giant head and shoulders and then the large double top.
All that happened recently was a knee-jerk rally back to the 126 neckline of that double top. This represents formidable resistance. While EURJPY could have some bounces along the way, this pair is going lower overall.
Now let’s look at the precious metals, starting with XAGUSD (spot silver):
Many weeks ago, I observed silver’s breakout beyond its seven-year downtrend line and also the neckline of the more recent inverted head and shoulders. That’s when I suggested bailing into silver at $18.47 then $19.11 and then $19.43.
We had a take profit at $25.87 and made a bunch of money on that run-up.
But that was then and this is now. As silver’s volatility expanded to incredible levels, I emphasized I was staying on the sidelines. In some cases, silver was going up as much a $6 in a week. That’s in stark contrast to the very narrow trading ranges that proceeded the run.
This massive volatility expansion always indicates emotions are running high and traders are experiencing FOMO (fear of missing out). FOMO begins when you miss silver at $19, or $20. You keep missing it as it goes through $23 … $24 … $25. Now all your friends are coming in. Everyone's saying silver and gold are going to the moon. Then you get in too late because of FOMO (fear of missing out).
And then a drop happens because everyone who wanted to buy the rally has already bought.
That’s why I was skeptical the run would continue. I expected we would have a turn lower and that's exactly what happened.
What’s more, I don’t think the drop is over yet. I suspect silver will retest the breakout at $20 or perhaps even lower.
Silver’s path of least resistance is lower so I would use any rallies as an opportunity to get short here.
The same applies to XAUUSD (spot gold):
As with silver, I've been saying for the last several weeks that gold appears to be overbought. There was a very contained run-up until volatility exploded and gold jumped $100 in a week for three consecutive weeks.
When I see this kind of volatility expansion, I’m ready to hand over the reins to the other guy. Even if I have to leave something on the table, so be it.
In the last couple of weeks, I observed the emergence of a symmetrical triangle and advised my Elite and gold traders to start getting short gold at $1,912 and $1,894.
This has worked out well so far. Gold is now trading considerably lower at $1,860. I think there’s more downside available and gold could retest its breakout area around the $1,750 level.
That means there’s perhaps $100 left before we see meaningful support for the yellow metal.
So how about the NASDAQ?
There’s a bit of a tug of war going on in the NASDAQ right now. A couple of weeks ago the index made a meaningful bearish key reversal. That suggests we should see a containment of prices around that level.
However, there could still be another rally to rechallenge those highs. The NASDAQ is still within a very steep channel. That channel began with a bearish key reversal that’s almost the inverse of the one a couple weeks ago.
In fact, the channel has been defined by a series of bullish key reversals that kept propelling prices northward. Last week the NASDAQ made another one, which is why we could see one more run to retest the highs.
However, be warned that volatility is only going to increase here. You’ve seen what happened with silver and gold so keep your risk levels low and be cautious.
And that’s it for the week!
To recap, I’m bullish on EURCHF, GBPCHF and GBPNZD. I’m temporarily bullish on the US dollar but still expecting it to drop over the long term. Accordingly we should see weakness in EURUSD. I’m bearish on USDJPY and EURJPY and the precious metals too.
I wish you a very healthy and prosperous trading week.
Mark "GBPNZDMajorMover" Shawzin