This Major Currency Pair is Significantly Weakening … Here’s What You Need to Do
I’m on the road this week, so this report will be a bit shorter than many of my past analyses.
As I don't have my regular two-monitor setup available, I therefore can’t visualize everything as I normally do. I do hope today’s substance will make up for the shorter length.
There’s a non-trading reason for this road trip too: my son is going to college. This is a very wistful time for me because I have a phenomenal relationship with my son. But we all know that growing up is a necessary process of life. I'm going to miss having him around every day, but I’m sure he’ll learn a lot from this new and important phase of his life.
Now let me get into this week’s review, starting with the New Zealand dollar …
As measured against a host of currencies, on balance the New Zealand dollar is weakening against most major of its competitors. Here I'm looking at GBPNZD (the British pound versus the New Zealand dollar) pair:
Note that GBPNZD has been in a stealth uptrend for quite a few years now. Along this uptrend you can see it’s regularly retested that sloping line before rising to new highs.
Most recently, GBPNZD established a rather subtle double bottom at the 1.90 level. I find this significant because each of the two bottoms was a bullish key reversal. (That’s when the price tries to make a new low and then rebounds to close at or near the high. It tells us that the buyers were back in control by the end of each week.)
I think this stealthy double bottom at 1.90 will act as a floor and that higher GBPNZD prices are on the way, even if we see some consolidation first.
That’s why I recommended taking a long position in GBPNZD at 1.9801 a couple of weeks ago. Currently this price is hovering at 2.205 or so, which is a decent profit. However, there could still be some turbulence and volatility in this area before the next leg up. So if you’re holding this position and are nervous about keeping those 200-pip gains, feel free to take partial profits at this level.
Having said that, I feel patient traders will ultimately be rewarded handsomely on this trade. I see the New Zealand dollar weakening against a host of other currencies and GBPNZD is well-positioned to reap a substantial reward from this trend.
To further illustrate my analysis, here’s NZDUSD (the New Zealand dollar versus the US dollar):
NZDUSD has run into headwinds at the 0.67 price level consistent with the resistance level it's struggled with in the past. That’s created a double (even triple) top with NZDUSD unable to break out of its long-term downtrend.
Other evidence that NZDUSD will go lower includes the bearish key reversal last week where the price surged higher before closing near the low. I believe this reversal is pointing in the direction of NZDUSD’s future price trend for at least the next few days and weeks. This pair should drop, the only question is how fast and how deeply.
Now here’s GBPJPY (the British pound versus the Japanese yen):
This highlights what could be an amazing emerging opportunity because it looks like this pair is at a key inflection point. Will it go up? Will it go down? Either way the move is likely to be significant.
On the bearish side, the long-term pattern appears to be a rounding top. Within that rounding top, there’s a double top and multiple shoulders on either side to create a complex head and shoulders pattern.
This bearishness is consistent with GBPJPY’s long-term downtrend and suggests lower prices lie ahead.
However, recent price action has shown real momentum to the upside. GBPJPY has been tracing out what looks like a bullish ascending triangle as it rises along a new trendline.
Whether that new trendline holds or not is the big question. What I’m looking for is a breach of the 1.35 – 1.36 level to the downside. If and when that happens, it should be the catalyst for sending prices lower.
If GBPJPY can avoid that breach, then I’m looking for it to take out 1.40 on the upside and launch a new bull trend in this pair.
Adding fuel to the potential GBPJPY fire, we’ve most recently seen an inside bar. (An inside bar is one where the high and low are completely enclosed within the previous high and low.) Such a compressed range is often a catalyst for an explosive move.
I feel the upcoming explosion will direct the price lower, although I’m on the sidelines and waiting to see the direction with certainty. Remember that it’s often the best policy to let the market tip its hand before getting into a trade to ensure you enjoy the best possible risk/reward relationship.
Awhile ago, I advised members to get long GBJPY around 1.35 and we banked a nice 500 pip profit there. But momentum on the upside now seems likely to stall out and my expectation is that we will resume in the direction of the major trend: down.
If the market shows me something different, then I'll jump aboard the “let’s go long GBPJPY again” train.
Now here’s EURUSD (the Euro versus the US dollar):
Last week EURUSD had a major key reversal where it rose just short of the 1.21 area before collapsing by the end of the week. The sellers were in control as the markets closed for the weekend.
This bearish key reversal is likely to put the brakes on recent upward EURUSD momentum, so if you missed the earlier run, don't chase this market now. I feel EURUSD will stall out and prices will either drop back or continue to consolidate between 1.15 and 1.18 for the foreseeable future.
EURUSD also bumped up against resistance at the same level as a historical bearish head and shoulders price pattern. So while it's going to be interesting to see where prices go from here, I ultimately expect EURUSD to rise over time due to USD weakness.
Let’s look at the precious metals now, starting with XAGUSD (spot silver):
Silver broke out of its seven-year downtrend just a few weeks ago after tracing out a very bullish inverted head and shoulders price pattern. That pattern was the green light to get long at the $18.50 - $19 area and the initial rise was explosive.
But that was then, and this is now.
During and after that meteoric rise, silver has experienced a tremendous volatility expansion where the price rose $4 in a week or else traded in a huge $4 - $6 range. This is massive volatility when you consider that for many years, silver showed little to no volatility at all.
Typically when volatility expands like this, it indicates a change of direction … even temporarily.
Speculative fever and fear of missing out makes for a very unstable market. In fact, this isn’t a good environment for trading and it’s why I’m on the sidelines with silver right now. (I actually have a small position in gold, but more on that in a moment.)
Amongst all this volatility, silver traced out an inside bar last week. This represents a compressed “coil” of energy which will be unleashed in one direction or the other.
How it takes to unleash will probably determine the direction.
That’s because for a sustainable uptrend, we want to see continued consolidation and a succession of inside bars to create a base. Only then can we expect the next leg up.
If silver can’t build such a base at this level, then the next move is likely to be down.
So silver could be due for a correction, or else a dampened range. That’s why I’m waiting to see how this plays out before entering this market again.
Understand that it’s very difficult to assess your risk in the kind of volatility we see in silver right now. The two important components to a trade are to identify the setup and also to identify the risk. Right now I can’t do either in this market.
(As a counter-example, it was easy to identify the risk as that inverted head and shoulders finished forming -- and just before the big breakout. It was an easy call for silver to erupt massively from that base, just as it’s a difficult call right now.)
In the meantime, XAUUSD (spot gold) has also seen a lot of volatility lately. Here’s a weekly chart for the yellow metal:
Up until the last few weeks, gold’s price movements were very controlled and steady. Then gold took off like a rocket with massively expanded volatility.
I’ve made a tremendous amount of profit on the upside during these kinds of moves, but due to the same “range expansion” concerns I just discussed with respect to silver, I feel that gold could settle back. It might even fall back as far as its trendline to the $1,800 level or thereabouts. At that point, I would expect it to stabilize before another run to the upside.
That’s why I have a small short position in XAUUSD right now.
Here’s a daily chart of XAUUSD to help explain why I took this short trade:
Prices are starting to trace out a symmetrical triangle as well as what could be a bearish double top.
Now of course any short trade is very presumptive in this market because gold is still very much in an uptrend. But I do see prices stalling out, and for my gold program, I recommended selling gold at $1,949 with a limit order. Anyone in that trade should have some profits.
Is it time to take those profits? Perhaps partial profits, as gold could still spike up within the confines of the triangle. But to my mind, there’s still pressure on gold because the US dollar is at strong support and likely to bounce a bit higher in the next couple of weeks.
My target on this gold short is a sub-$1,900 gold price.
So what’s happened in stocks this past week?
Here’s the S&P500 stock index:
The S&P has been trading within the confines of a massive reverse symmetrical triangle and it’s knocking on the door of sustained all-time highs.
The S&P is now at a key resistance level, of course. But the path of least resistance is still higher. Just look at that advance: the price has been marching higher on a very aggressive path. There really isn’t any apparent weakness there right now.
And while at some point this relentless rise is going to seem excessive, I wouldn’t get in front of this big bad S&P500 bull right now. This is not the time to go short.
I would wait for a clearer sign of a potential turn. I don't see that now, so despite what could be a double top price pattern, I'm waiting for further evidence to consider any short trade.
If this climb seems too crazy to you, remember the Fed’s record low interest rate, plus negative returns on other major investments such as Treasury bonds. There’s no work for some people to turn to other than the stock market. And you've got a very friendly US government providing unlimited amounts of stimulus too. All this keeps the S&P 500 going aggressively higher and it doesn’t seem ready to stop just yet.
And that’s it for the week! As I mentioned at the beginning, this report is a bit shorter than usual as I’m on the road right now.
But I think we covered a lot of ground anyway.
The main takeaways include: NZD weakness is a viable trade, particularly in GBPNZD if you can handle the volatility … GBPJPY is at a major inflection point and my suspicion is that it’s likely to drop … EURUSD is likely to consolidate or drop in the near future … silver and gold could follow the same path, especially gold … and the S&P500 isn’t a viable short yet.
I wish you a very healthy and prosperous trading week.
Mark "NZDVulnerability" Shawzin