Stock Market Rollover? Plus 2 Dollar Shorts and 2 Stocks To Consider
Before proceeding with my analysis of the major markets and the most important charts this week, I want to reinforce what I look for on a price chart.
This is USDCAD (the US dollar versus the Canadian dollar) which appears to be very back and forth. To the untrained eye, prices have been oscillating above and below a neutral zone before rising up and then down again.
But the first step to make sense of price action is to assess is what is the phase or condition of the market. There’s clearly been a downtrend in USDCAD lately.
And that means you need to get in sync with that major trend: short.
But before you can actually go ahead and do that, you also need to look for the governing chart pattern. Here it’s a head and shoulders price pattern, which is bearish. This pattern was confirmed when USDCAD breached the neckline that joins the pattern together.
What else? Once we understand the direction and the governing chart pattern, there has to be some price action that supports them. In this case, there’s a bearish key reversal in the most recent week.
(Traders tried to push prices higher earlier in the week, but by the end of the week USDCAD closed at the low. Therefore this is a key reversal bar in the direction of the trend which supports the bearishness of the head and shoulders.)
Since everything lines up, we want to hop aboard this trend. We want to place a sell stop order under that key reversal and wait.
But there’s an X-factor here to consider here: the trading environment.
So what exactly is that? It’s the general behavior of the market.
In this case, the market has been very directional until recently. Then it began churning around within a relatively small trading zone over the last six weeks.
Such environments tend to cause traders to lose their discipline -- they trade too much when the opportunities are limited. Traders then deplete their emotional and financial capital very quickly.
It’s not hard to see how this happens. Traders assume the enormous volatility in the last few weeks -- in the stock market, in gold, in FX -- will continue and so they trade expecting fast, wide-swinging price action.
Instead that volatility’s compressed. The daily ranges or the weekly ranges are starting to come down and we aren't getting the same directional momentum.
You need to be very cognizant of these market environments when changes like this occur. That doesn’t mean not trading, but instead trading very selectively. Find very high-quality trades like USDCAD and then be both patient and cautious.
It also means placing very wide stops well out of the current range. This gives trades like this USDCAD short the time and room to work its magic.
I think USDCAD will drop under 1.22, about 300 pips from where it is now, and perhaps even under 1.20.
But it could very well continue drifting back and forth in a trading zone before it picks up steam directionally.
So while I advocate getting short USDCAD just under current lows, discipline and patience are important right now. Use a smaller position size, a wider stop, and give this trade room to work.
Now let’s look at an even bigger picture: USDI (the US Dollar Index) which measures dollar against half a dozen of the most highly active and important currencies.
USDI, just like USDCAD, is in a downtrend and also features a major head and shoulders price pattern.
After a precipitous fall from the sloping (and therefore extra bearish) neckline of that head and shoulders, USDI grabbed a foothold of support along a major support line.
I anticipated that and said a bounce was likely and a trading range would probably ensue.
That’s what we saw but now USDI is poised to resume its major trend: down. USDI can only go one way and that’s lower.
How it gets there is the unknown factor. It could continue for a bit longer in a trading range. But over time it’s going to drop.
That’s why I like the USDCAD short trade so much. In fact, you can look at most any dollar correlated trading pair and there should be a way to short the dollar.
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I cover everything you see below in30 minutes of careful analysis:
- How to analyze a price chart step-by-step
- Why USDCAD is such a great short right now (with price targets)
- Why you need to consider the trading environment before placing trades
- Why I remain dollar bearish (starts at 6:43)
- Is there a bull trap in USDJPY? My answer ...
- What patterns could decide the next fantastic opportunity in EURJPY
- What I'm waiting for in silver before I make another trade inXAGUSD
- Gold needs this to happen before a sustainable rise can take place(starts at 15:37)
- What acrobatic planes and today's stock market indices have in common
- QS and BYND have something very important in common as shorts
- Plus much more!
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