The Best Ways to Short NZD and Trade the Precious Metals & NASDAQ
Last week, a government inflation report showed that inflation soared to a yearly high of over 5%. This was the greatest increase in prices since 2008.
But as I always say, you can't trade the news.
That’s because the market is ahead of the news. The market is a discounting mechanism. Price is ahead of the news.
You see, despite the fact inflation pushed to a 13 year high, the bond market and other markets are suggesting this is just a transitory effect.
Take a look at this chart of the 10 Year US Treasury yield:
We would expect yields to keep rising if inflation is going higher. Yet that’s not the case at all.
During this particular time period, the 10 year yield rose from 1% and topped out around 1.75%. And despite this recent monumental hike in inflation, rates are actually going lower and are currently hovering around 1.45%.
If we really were experiencing the greatest inflation since 2008, you’d expect interest rates to keep rising. Instead yields have been falling after piercing the neckline of a low, flat double top.
While there was an earlier consensus that the 10-Year yield was headed over 2%, it now looks like more probable it will drop to 1.25% or thereabouts.
And this is why you can't trade the news that's in front of you. The market is a forward-looking mechanism, while an inflation report is a static number that reflects a backward-looking measurement.
The market is looking one month, three months, six months, nine months down the road. It's saying this inflation bump looks to be more transitory than sustainable.
So let's look at the various asset groups and see what we can divine from the dollar, gold and certain growth stocks.
Here’s a multi-year chart of the DXY (the US Dollar Index) which tracks the dollar against a half dozen of the most liquid currencies.
In the last several months, DXY has been hugging a major support line. Recently it bounced off that support line, which is counterintuitive with inflation going up.
We should have seen interest rates going up and the dollar going lower. This is what a lot of the street was betting on. Yet it seems the dollar is going to spend a lot of time in the current trading zone.
I do expect the dollar to get weaker over time. But for the short term, it looks like the dollar has some support and could go higher to the upper level around 91.50.
So with the likelihood of some support in the US dollar, one of the pairs that I expect to go lower is NZDUSD (the New Zealand dollar versus the US dollar):
There’s substantial resistance in NZDUSD at the 0.75 price level, including a key reversal where the price made a new high and then closed on the low. These reversal bars often point in the direction the market wants to take.
It appears NZDUSD has built up significant resistance and the path of least resistance is lower. I think we’ll see NZDUSD back under the 0.71 price level and likely a good deal lower.
But the dollar correlated trading pair that holds most of my attention is USDJPY (the US dollar versus the Japanese yen):
I'm looking at the current price action not only for what it’s doing, but also what it's not doing.
For the last couple of years, USDJPY has been traversing within a descending triangle. I felt USDJPY would complete the triangle and break down through the neckline.
Instead the price has held at the current level. There should be weakness here, but instead there’s strength by virtue of higher lows.
If this market was setting up to go down, we should be seeing the opposite.
So sometimes by virtue of what a market is not doing, we can see there's only one other way it can go. If a market isn’t going down, then it's going higher.
That’s why I’m watching USDJPY very carefully.
Historically, USDJPY has made lower highs along the trendline of the descending triangle. But that might be about to change. If USDJPY busts this pattern and starts making higher highs, then we’re likely to see a major breakout.
The way I would play this is to stick a buy stop at 110.40. If the market goes down from here, no harm, no foul. But if the market rises through that buy stop, it's very likely to catch a bid and go much higher. This way we can have our cake and eat it too.
With a resting order (also known as a pending order), we don't have to watch the market. We don't have to worry about it. The market will put us in if it's going in the anticipated direction.
Now I hate to be an “I told you so” kind of guy but for the past couple of months, I've been predicting that GBPNZD (the British pound versus New Zealand dollar) was going a lot higher -- thousands of pips higher.
GBPNZD has now closed on a multi-month high near the 1.98 level. So despite the fact it’s been on a carnival ride for some time, the truth is in the patterns. Those patterns include the double bottom all the way back in late 2016, early 2017 that was quickly followed by a rounding bottom.
These two patterns shared a neckline which in turn provided support for a new double bottom.
Despite that, GBPNZD has been a real seesaw requiring a lot of patience and a very wide stop.
But now I think a lot of the risk now has come out of this pair. GBPNZD is rising along an uptrend line and by piercing the 1.98 resistance level, there’s only blue sky above.
If you think you've missed the boat, I feel this move is just starting. So while I have several hundred pips in the bag on long positions already, I think there's at least another 1,000 pips, perhaps 2,000 and even 3,000 pips to go on the upside in GBPNZD.
This is the best bang for your buck in the FX market right now. It’s the best risk reward opportunity.
Keep your stops wide and be patient and look to hold onto this pair for the long run. Trust the pattern and ignore the noise.
I think we're about to uncork into unbelievable heights in GBPNZD over the course of the next few days, weeks, months, and perhaps even years.
For further insight into the weakness in NZD, here’s NZDCAD (the New Zealand dollar versus the Canadian dollar):
There are some major bearish price patterns in the form of an Adam and Eve double top, so called because one top is a single spike and the other top has numerous spikes.
This topping pattern suggests the trajectory of this market is lower over time. What’s more, there’s a more recent double top with the neckline around the 1.87 area.
Then last week NZDCAD traced out an inside bar: that’s when the weekly range from low to high is contained within the previous week’s high and low. An inside bar always represents a point where the market is storing energy.
I’m surmising that NZDCAD is going to uncork to the downside thanks to the earlier bearish patterns. So look to get short just under last week's low. Place a sell stop there and let the market put you in as it drops.
Now let’s take a look at XAUUSD (spot gold):
I've been looking at spot gold through the prism of an ascending broadening price pattern.
All the way back at the $2,000 price level, I said it was likely that the yellow metal would pull back to the lower edge of the pattern. That's exactly what happened.
That drop was arrested with a double bottom. Now the question is whether price can continue higher or if it will instead retreat back to the lower support line.
While it looked for all the world like gold was heading higher, I was skeptical because of the major key reversals at the $1,950 level. Those reversals were always going to generate a lot of overhead resistance for XAUUSD.
And now it looks like gold isn’t yet ready to break through. The recent upward momentum is stalling and I feel gold could pull back to the lower support line once again.
I would look to short gold for a move lower in the short term.
Silver is a bit different at the moment. Here’s the weekly chart of XAGUSD (spot silver):
Silver has a very bullish inverted head and shoulders price pattern that’s underpinning the current price action and suggesting prices will go higher. There’s also an interim double bottom at the $22 price level and what looks like an ascending triangle.
I expect silver will continue to bump and grind because -- as with gold -- my concern is the major resistance above the $30 level (the neckline of the triangle). I think this will be a formidable resistance level for quite some time.
However, the price action in XAGUSD still looks bullish, which may seem contradictory since I said gold is going lower. But you have to look at every chart in the context of its own risk/reward parameters.
So gold is not silver. Silver is not gold. You have to look at them separately, and for now it looks like siler is going to continue to bump and grind within the triangle.
I will revisit trading in silver if and when it starts consolidating at or near the $30 level. For now, I'm just going to let it do its thing.
The same can be said for the FX market in general.
With the exception of GBPNZD and some of the yen pairs, the FX market has been pretty quiet and range-bound.
So I've been getting most of the bang for the buck trading the US stock market instead.
Here’s the NASDAQ stock index, which is a proxy for the tech or growth sector within the United States:
The NASDAQ settled just below its all-time high after its latest rise along a major support line.
So you can see that every time the index has hit the support line, it’s made a key reversal by making a new low before closing on the high. Several weeks ago this happened again, and it suggests the path of least resistance is still higher.
The price is now at what looks like a formidable resistance level around 14,000 in the NASDAQ.
But since I don't see any reversal price action or anything that suggests a double top, I'm thinking the NASDAQ is going to go through this level. When we hit these major levels, it's sometimes very turbulent.
So it’s possible we may see some bearish price action.
But right now, there isn’t any. The lowered yield in the 10 Year US Treasury yield would also suggest that the NASDAQ is going higher since lower rates are friendly to growth stocks.
One of those growth stocks on my radar is Beyond Meat (BYND) and as with USDJPY, I'm really intrigued by this chart not only for what it’s doing but for also for what it’s not doing.
BYND formed several bearish price patterns earlier, including two double tops.
That’s why I was aggressively shorting BYND and looking for a retracement back to the common neckline around $113.
Price did crash to that level, and then even dropped below it. BYND should have dropped inexorably and inevitably lower after that, but the market had other ideas.
And this is why I say that while I can do my analysis, it's inherently subjective. The market is always right. The market is always going to tell me what it wants to do. And so I always surrender to the will of the market.
When BYND broke its neckline, it wouldn't go lower, and eventually rallied back through the neckline. This generated all kinds of warning lights in my head that this price action was not consistent with the expectations of previous bear patterns.
Then there was an inside day bar which looked like a bear trap, meaning that anybody who chased the lows under $113 was now trapped. When these traps are sprung, they can uncork in the other direction very, very quickly.
Just look at how quickly BYND rallied with two gaps on the way up.
Now I expect further bullish price action. There was a key reversal on Friday which to my mind is pointing in the direction of this new emerging trend.
I feel there’s now a bullish inverted head and shoulders with an upsloping neckline here:
If BYND smashes through the $160 level, there’s a lot of blue sky up north. The path of least resistance is higher over the short term.
Another stock that’s likely to produce a result one way or another quite soon is Tesla (TSLA):
Recently, TSLA broke its long-term trendline, suggesting a sharply lower price.
But now TSLA is coiling and forming a symmetrical triangle. We’re nearing the business end of the symmetrical triangle with a coil with multiple days of inside trading action.
So it won’t be long before we see a breakout one way or another.
There could be a fake-out first, of course. TSLA could break out one way, reverse and then break out the other way. But some very explosive price action should be coming soon. Ideally there will be a good risk/reward trading opportunity when it happens.
And that’s it for the week!
I’m neutral to slightly bullish on the US dollar in the short term, meaning that I expect USD pairs to trade accordingly before the long-term USD bear asserts itself. NZDUSD and USDJPY are good ways to play this. I’m bearish on NZD in particular and therefore bullish on GBPNZD and bearish on NZDCAD.
I expect gold to drop and silver to hold steady or rise.
And I feel the NASDAQ is ready to rip on the upside with BYND offering a good way to play this move. TSLA could break either way explosively.
I wish you a very healthy and prosperous trading week.
Mark "10YearSurprise" Shawzin