The Biggest Opportunity on the Board, 1000 Pips up for Grabs
I've put together a shortlist of trading pairs for you this week.
These are based on my observation of the relatively weak currencies versus their stronger counterparts:
In today’s market environment, on balance, the strongest currencies are the New Zealand dollar (NZD), Australian dollar (AUD), Swiss franc (CHF), Japanese yen (JPY), and Canadian dollar (CAD).
On a relative basis, the weakest currencies are the Great British pound (GBP), the Euro (EUR) and the US dollar (USD).
It, therefore, follows that you want to pair the strongest against the weakest. This creates the best trading pairs as follows: GBPCHF, USDJPY, EURNZD, and NZDUSD. You want to short the first three pairs and buy the last one.
These are the most tradeable pairs for this summer. Today I’ll examine several of the constituent pairs and currencies in detail.
Let’s start with the USD as a standalone against a half dozen of the most liquid pairs in the form of the USDI (the US Dollar Index):
During the peak of the coronavirus panic, we had a liquidity crisis which I believe represented the peak for the US dollar following a long ten-year uptrend.
That’s why I believe that over the course of the next few days, weeks, months, and years, we’ll see the US dollar traverse lower. Not right now, but soon. At the moment USDI is tracing out what looks like a head and shoulders top with some major support near current levels and then an additional support level farther down.
The real action will start when the neckline of that head and shoulders is tested and broken.
So what are the early indicators that this will happen?
NZDUSD (the New Zealand dollar versus the US dollar) looks like a strong candidate to foretell future price action:
For the last 10 years, we've seen a major downtrend in NZDUSD including a double top continuation pattern that suggested that once the neckline was pierced the pair was going lower. NZDUSD did in fact drop significantly after that neckline failed.
But now the pair has snapped back into a trading range. I feel we're looking at a potentially busted trading pattern by this point. By “busted trading pattern”, I mean that the earlier bear price pattern is “busted” as a new bull pattern forms and suggests a new uptrend in opposition to the earlier one.
NZDUSD is showing an asymmetric double bottom with a pronounced left shoulder and a potential right shoulder forming right now. This creates an inverted head and shoulders pattern.
Once NZDUSD can breach the neckline around the 0.68 level, the earlier double top price pattern will be busted and that will confirm new upward momentum in the pair.
Over time, I expect NZDUSD to go higher over time and any dips should be considered buying opportunities.
Now here’s USDJPY (the US dollar versus the Japanese yen):
If you’ve read previous reports of mine, you’ll know I'm very bearish on USDJPY due to a number of bearish price patterns starting with the double top in 2015 which was eventually confirmed as part of a head and shoulders price pattern. Once this pair breached the 116 area, it’s been in a bear market ever since.
I expect the lower edge of the current descending triangle will be taken out eventually, although USDJPY could continue to trade sideways for a while yet.
In fact, I wouldn’t be surprised to see USDJPY perhaps trade back up to the 109 area – the upper edge of the triangle. If this happens I would look at it as an extra opportunity to add to my existing short.
I remain very bearish on USDJPY because I strongly believe that ultimately, this pair is going lower over the long term.
Now for some non-USD pairs …
One of the best examples of a busted trading pattern is what we’re seeing with the AUDCAD (Australian dollar versus Canadian dollar) price action:
About eight years ago, AUDCAD formed a double top, which proved to be the top for the market and heralded a bear market in this pair.
AUDCAD struggled back up to the breakdown area a few times, but ultimately each peak represented only a failed rally before another decline. During the course of this price action, AUDCAD traced out a long-term descending triangle.
Once the price action pierced the neckline of that triangle, the expectation was that the downside trading action would continue. This proved to be only temporary.
AUDCAD has very quickly snapped back into its trading range and even broke the earlier neckline in the last few weeks.
This price action now represents a busted price pattern, meaning that the earlier bearish patterns are now “busted” in favor of new bullish action.
That’s because AUDCAD has traced out an inverted head and shoulders with a sloping neckline. The neckline slopes as the right shoulder is significantly higher than the left. This is very bullish and I expect AUDCAD prices to rise quite rapidly once it asserts its bullish momentum.
Another classic example of a busted pattern is the similar price action in NZDCAD (the New Zealand dollar versus the Canadian dollar):
After the double top, NZDCAD declined in a seesaw manner much like AUDCAD.
And again, once it cracked the 0.82 necklines, the price action didn’t play out as the bears would expect. Instead of a steadily lower price, NZDCAD bounced sharply above the neckline. What doesn't go down is instead destined to go higher.
Any bears who sold on the spike down are now trapped and have to get out of their positions. While there’s some potential major resistance at current levels, there’s no doubt the earlier double top is now a busted pattern.
This is another pair to buy on the dips if you’re patient. Remember that the summer season is usually slow when it comes to FX movements.
In this chart, I'm looking at GBPNZD (the British pound versus the New Zealand dollar):
Remember that on balance. I expect the British pound to be relatively weaker against most currencies and the New Zealand dollar to be stronger. Therefore my expectation is that the GBPNZD is going to drop despite its haphazard rise for the last few years.
This is a relatively new stance for me. I had previously been a profitable bull in GBPNZD following the double bottom and rounding bottom price patterns several years back. These were the governing patterns to drive the pair upward.
But now the price has collapsed after going to 2.18 at the height of the coronavirus panic. This was an exhaustion top, a major reversal. Since then, it’s become apparent that the extreme movement acted as the head of an emerging head and shoulders pattern with a bearish sloping neckline.
GBPNZD is now trending down. I expect it to drop very quickly over the course of the next few weeks and I would look at any rally as an opportunity to get short. I think this pair will see the 1.80 price level as support (and perhaps below that), which represents 1,000 pips from current levels.
That means there’s still an opportunity to be short GBPNZD if you aren’t already.
Now let’s look at the precious metals, starting with XAGUSD (spot silver):
Here we see a building opportunity for a potential busted price pattern above the long-term descending triangle that’s been formed in XAGUSD over the last six years.
The lower highs that define that triangle have yet to be taken out, but current XAGUSD prices are getting very close to breaking that trend.
If silver breaks above $21.15 (the September 2019 high) that would bust the triangle decisively. It would also finish trapping any bears still short silver since its very short-lived drop to the $12 range.
However, don’t rush in just yet. Silver has always flattered to deceive as far as a breakout is concerned. It remains in “prove it” mode as it’s disappointed so many times in the part. There’s still a good chance it could turn back at current levels and remain within its long-term trading channel.
Until we see what’s going to happen this time around, I suggested waiting on the sidelines. What gives me some bullish expectations here is that the dollar will ultimately break down, resulting in higher prices in silver in the future.
The same long-term bullishness also applies to XAUUSD (spot gold):
Gold is hovering near multi-year highs at the $1,800 level. The last time we saw that was in 2012, which means the yellow metals is sitting at a multi-year resistance level.
It’s also bumping up against a major resistance line on its most recent trend.
In the meantime, gold’s price action has been very constructive, with continued consolidation between $1,650 - $1,800. The longer it consolidates here without a major selloff, the more powerful the rally once it breaks out.
The key level to wait for is when XAUUSD reaches a new price level of over $1,800.
Now for the stock market. In this chart. I'm looking at the NASDAQ stock index:
The NASDAQ is sitting at the crest of a major resistance level within the cadence of an ascending broadening price pattern. What’s more, we’ve seen very constructive price action in the form of multiple bullish key reversals, including the one from last week.
A bullish key reversal is when the market makes a new low but then closes at or near that week’s high.
These key reversals have kept pointing the way higher despite all media-hyped economic crises to the contrary. You could definitely say this NASDAQ has rallied very strongly against a wall of worry.
So it will be interesting to see how prices play out at this level of new all-time highs. Be careful here if you’re playing the long side, as the NASDAQ’s wild run hasn’t been replicated in non-tech indexes such as the Dow Jones.
That’s because the DJIA (Dow Jones Industrial Average) has shown contracting price action:
The DJIA has fallen well short of its previous highs, meaning it has failed to confirm the NASDAQ’s more bullish price action.
In fact, the DJIA has been playing within the boundaries of a very large reverse symmetrical triangle, otherwise known as a megaphone top. This particular instance may not end up being a top, but I think
continued consolidation and sideways (or lower) trading action in the DJIA is most likely.
My ‘neutral at best’ stance is primarily due to the bearish key reversal a few weeks back and subsequent price action. That reversal has served as a short-term top with the DJIA able to reach only lower highs since that time. The DJIA rally is looking somewhat tired here and a consolidation or downward correction looks most likely.
And that’s it for this week!
Due to individual currency strengths and weaknesses, I like going short GBPCHF, GBPNZD, USDJPY, and EURNZD and long NZDUSD. I’m still waiting for price action to break out for the precious metals. And I think we’ll see consolidation or a mild correction in the US stock market in the near future.
I wish you a very healthy and prosperous trading week.
Mark "DollarPeak" Shawzin