Spinning in Place: The FX (and Metals) August Conundrum
As I expressed last week, past experience has made me extremely wary of trading trend continuation moves in August. Seasonality during this period means low volume and consequently either low volatility (prices go nowhere) or high volatility (price moves prove to be nothing more than random market action).
The frenetic moves we saw in last week's trading confirmed my trepidation. That’s because there were some extreme moves but very little trend follow-through.
And that’s why the past two weeks of narrow-range bars in the US Dollar Index (USDI) don’t feel like a “coil” that will unleash further market energy at this time. Instead, they feel more like a harbinger of the tight ranges we’ll continue to see in the FX markets for the next four to eight weeks.
The Euro comprises about 60% of the USDI, by the way.
Which is why it’s typically the mirror image of the USDI as we see with this EURUSD (Euro against the dollar) weekly chart:
EURUSD is currently mired in the middle of a long-term downtrend channel. There’s no significant price action either way.
I still believe the long-term trend is down so consider shorting any rallies like the one we’ve just seen in the pound.
Yes, the GBPUSD (British pound against the dollar) pair saw a minor bounce along with pretty much all GBP-correlated pairs. Given the pummeling this currency has taken of late, combined with GBP-correlated pairs trading at multi-year lows, the bounce was not surprising.
However, don’t be seduced by what I believe will turn out to be a “dead-cat bounce” and an inevitable retreat to the downside. I don’t see any chance of a sustained rally in GBP and we’re more likely to see much lower prices soon.
You can see this in GBPCHF (the pound against the Swiss franc) too.
Here we see another long-term decline. GBPCHF caught a bid at support in the last week, much like GBPUSD. It might bounce for another 4-8 weeks before the downtrend resumes
It’s virtually the same story in GBPAUD as you can see here:
Note that this pair bounced even after last week’s quite bearish key reversal, which itself followed a bullish key reversal the week before. This market is simply gyrating in place for now.
However, I expect GBP’s overall downtrend to resume once the summer doldrums are over.
Even my favorite short this year (USDJPY, the dollar against the Japanese yen) has bounced.
It’s been my favorite short due to historical bearish price patterns: the head and shoulders with a double top followed by a descending triangle.
I took a rewarding short position on the recent double top we saw within that triangle. The double top combined with narrow range bars and resulted in an explosive release of energy to the downside.
It was strong enough that the price did reach my target area at just over 105 (I was hoping it would go as low as 104 but 105 was close enough).
I have taken profits and for now, I’m on the sidelines while I wait to see how high this pair will bounce.
Now for a chart, I haven’t looked at for a while: crude oil.
As you can see, crude oil has been in a long term downtrend from over $100 to just over $55 per barrel today:
Along the way, we saw a double top continuation pattern followed by a retracement to the neckline of that double top. The price has then dropped once again with lower highs forming a small descending triangle.
There are multiple key reversals within that descending triangle which suggests we’ll keep seeing lower highs and an eventual breakdown below the neckline here.
But for now, crude oil will probably slide sideways before dropping to new lows.
Now for the metals, starting with spot silver (XAGUSD)…
Spot silver has truly broken out of its long-term descending triangle with a double bottom and a breakout above the neckline of that pattern.
It’s now consolidating at significant resistance between $17.50 and $18.50. Two things can happen here: this may be the pause that refreshes before the next leg of the silver bull, or we may see a correction back down into the triangle before silver can gather enough strength to re-ignite the bull.
This is a little more obvious when we drill down to the daily chart: here we can see that after XAGUSD
hit $17.50 it fell off with a series of three inside bars.
These inside bars represent coiling of energy which could be released either way. For now, I’m on the sidelines to see which direction this wants to go.
Gold is in a very similar position.
Recently, XAUUSD broke out of a long-term trading range between $1,200 and $1,400.
And while I feel the yellow metal will go much higher, it appears the XAUUSD might be stalling at the $1,530 price level. This is not surprising when you look at just how steep gold’s ascent as been from the initial breakout.
Accordingly, I would not rule out a consolidation trading range environment for spot gold.
You can see the similarity to spot silver on the daily chart with inside bars following a much longer high-volatility bar.
Again, this might be a pause before the next leg up, or we might see a correction back down to support. It depends on which direction the stored “energy” will be released.
Accordingly, I have cashed out my Long positions in XAUUSD and XAGUSD. I will be closely monitoring price action in these pairs for anther entry point.
The US stock indices soared to all-time highs recently.
Two weeks ago, the Dow Jones Industrials index (DJ30) plunged 2,000 points, then staged a 1,000 point rally and impressive comeback. But there was no follow-through.
Because with last week’s large inside-week “containment” bar, it’s now an open question where these indexes head from here.
I’m using a NASDAQ100 chart here but all three major U.S. indices are very similar with long-term uptrends followed by steeper uptrends marked with key reversals.
I would not rule out further momentum in the U.S. stock market to the upside.
So the watchword this week is patience. For now, this is a great week to sit back and see what happens.
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I wish you a very healthy and prosperous trading week.
Mark “FXConundrum” Shawzin