Two Stocks To Consider Buying (And Which FX Pairs to Short)
It’s been a while since I’ve been so bullish on the stock market and I have two stocks you should consider buying to take advantage of strength in a key U.S. market index.
But before we get to that, let’s cover the FX space first.
I’ll start this week’s report with an update on my favorite long trade: GBPNZD (the British pound against the New Zealand dollar).
If you’ve been following me for any length of time, you know I've been very bullish on this pair based on long-term patterns established in late 2016 and early 2017. The first pattern was a double bottom and it was followed by a rounding bottom. These shared a common neckline at 1.80.
That 1.80 level began as resistance and eventually became support for a new double bottom that’s propelled GBPNZD much higher in a massive move. I don’t think that move’s over yet.
That more recent double bottom used the earlier neckline to establish a new neckline around the 2.00 area. You can see GBPNZD was consolidating at this level and now we have what I call an inside bar in the most recent week. These are otherwise known as coil bars. They store energy and based on the prior bullish patterns, I believe that energy will eventually explode to the upside.
I've already got several long positions in GBPNZD, but if you're not in yet and you’re super aggressive, I recommend putting a buy stop above last week's high to catch a move out of this coil area.
Now let’s see how GBPNZD looks at the daily level:
Since the double bottom in early August, we've had a massive move off that foundation.
It looks like we’re climbing a tall staircase in this pair, one step at a time. Obviously we have a lot of background noise in British pound correlated pairs with Brexit and so on. So I do expect this to go up in fits and starts, but up overall.
To tackle something like this, keep your stops wide and also buy on dips. Last week was another good opportunity where we had an inside bar on the daily chart just like we do on the weekly chart. Again, this is a nice inside coil bar representing a coil of energy soon to be released to the upside for GBPNZD.
By the way, I've said that the New Zealand dollar (NZD) is the weakest currency on the board against all major currencies.
As additional proof, we're looking at NZDCAD (the New Zealand dollar versus the Canadian dollar).
This is a monthly chart and you can see the descent began with a double top at around the 0.98 level with a series of shoulders on either side. Since there are so many shoulders, we call this a complex head and shoulders. NZDCAD is now hanging on the precipice of a monthly neckline.
Based on prior bear price patterns, NZDCAD is ready to fall off a cliff and go lower. So I think the risk in this pair is not being short because this looks to be a high probability trade on the downside.
Now let’s look at NZDUSD (the New Zealand dollar versus the U.S. dollar).
During this downtrend, NZDUSD had what I call continuation patterns which arrested any rally and confirmed the downtrend. That includes a double top which projected that NZDUSD was going to break to the downside. We also see that last week NZDUSD had a key reversal at a substantial resistance area around the 0.65 price level too.
A bearish key reversal is where the bar made a new high but by the end of the week it has closed on the low. That bar points down and is confirmed by the prior patterns and trend.
So to summarize: NZD is the weakest currency. Just pick which pair you want to a short against it.
Now let’s look at the USDI (U.S. Dollar Index).
You can see USDI formed a small reverse triangle and USDI also had bearish key reversals. Together these indicate the potential for a huge sea change and a follow-through to the downside.
But I've also been saying I’m skeptical that we’ll have any meaningful follow-through to the downside of the U.S dollar just yet.
That’s because USDI caught a bid along a long-term rising support line. And we had a bullish key reversal right back into the major price action.
I want to focus on the reverse triangle with a couple of other examples and their subsequent price history.
This weekly chart of the NASDAQ stock index is a few years old and you can see a reverse triangle was not a valid reverse pattern here
Now here’s Facebook last year and again, a reverse triangle was nothing more than a consolidation pattern.
I suspect the same history may play out for USDI in the weeks to come. We might very well see a new high before the true reversal in USDI begins. There are plenty of reasons to be bearish on USDI (such as the 42-year price chart I’ve shown you in earlier reports) but I don’t think USDI is ready to undergo a true trend reversal just yet.
Now let’s check out USDJPY (the U.S. dollar versus the Japanese yen).
USDJPY continues to work within the confines of a large descending triangle. This means it might still rise north of 110. However, I'm extremely skeptical of further bullish momentum here because we’re sitting at a very interesting resistance area at 109 with a very narrow range coil.
It looks like USDJPY’s recent surge has run out of steam. I still feel this is going to break to the downside. So even though the dollar looks like it's going higher against most other currencies, I still feel USDJPY will continue to break lower.
Last week I suggested putting a sell stop at one 107.95. You can leave that in place. If the market continues on its merry way to 110, that's fine. You're not going to be filled. But if we get a break lower, you’ll be positioned nicely for the ride down.
I’ll consider changing my bearish stance on this pair if it can break out of the descending triangle in the weeks and months to come. For now, I remain solidly bearish on USDJPY.
Whereas I think the New Zealand dollar is the weakest currency on the board, the strongest currency is the Canadian dollar (CAD).
We’ve already taken a quick look at NZDCAD, so here’s EURCAD (the Euro against the Canadian dollar) for comparison:
You can see the double top and also what looks like a descending triangle. And you can see there was a false breakout before EURCAD temporarily returned to the triangle.
EURCARD is about to clear some major areas under 1.44. If so, that will open up a whole new price level below. So I think that EURCAD not only represents a great short but also an indication of the strengthening Canadian dollar overall.
Now onto the precious metals, starting with XAGUSD (spot silver) at the monthly level.
Last month we saw this huge key reversal in a silver. This suggests we should see follow-through in the direction of that price action.
However, silver’s dug in and resisted the drop. Whenever I see a certain price action that doesn’t conform to expectations, I start looking for a trap. So for instance, if silver closes a on the high of the month and then continues higher next month, it would indicate that silver is actually going to turn around and the key reversal can be ignored.
However, I still think the predominant pattern in silver is the huge double top from several years back. I believe the silver market remains trapped within a long-term sideways channel.
That’s why I’ll be looking for bearish momentum in this market. Even if silver closes on the high of the month, that might represent the last of the rally. Once it starts going lower next month, this would fit my bearish expectations.
Now let’s check out XAUUSD (spot gold) on a weekly basis.
On a purely objective basis, gold should go higher. We have the double bottom and then gold cleared the neckline with the current pattern looking like a consolidation that should continue to the upside.
Having said that, there's something that’s giving me pause about that scenario. We had a double top at the $1,555 – $1,560 area accompanied by key reversals.
So which pattern will win? The double bottom or the double top? One way or another we’re getting close to a resolution where we should either continue higher or else retest the $1,400 price level.
Meanwhile, the U.S. stock market indexes have been strong. Below is a weekly chart of the NASDAQ and as you can see, it closed at an all-time new high last week:
This has not been a shock to me. Multiple bullish key reversals pointed the way up along the support line. It looks like we could be on the cusp of another bull market.
The S&P chart looks similar. However, we haven’t seen the Dow Jones going to an all time high yet. That suggests there could be some turbulence at these levels. We could have a false breakout and a retreat back to lower levels before another takeoff.
But sooner or later stocks look ready to move up again. Which ones look promising to play this bullish potential?
Facebook (FB) for starters.
The driving pattern behind this stock is the double bottom around the $125 price area. This looks like GBPNZD did in August, where we saw a very clear price pattern that provided liftoff for later price action.
In my mind, Facebook is headed higher, especially if the current price is, in fact, tracing out an inverted head and shoulders as I’ve drawn on the chart. If FB can clear the $191 – $192 area, it should leave a lot of space for a rally back above $200.
Now let’s look at Tesla (TSLA) for comparison purposes.
I've made all kinds of money in this stock on the long side and the short side but going back several years ago, I've been extremely bearish on Tesla. That’s due to long-term bearish price patterns including a double top at the $380 level.
I previously told members to get short at $291 and my price objective was $180. We just made it to that target before TSLA bounced to create something of a V bottom. That’s a pattern I’m very skeptical for being a true bottom.
I didn't think this was sustainable. And quite frankly, when we started dropping again, my expectation was that we would have a sustained continuation to the downside.
So with TSLA, we had a downtrend line and a double top. And we should have seen a follow-through, but instead, TSLA put in ascending lows. I knew this was trouble for the shorts and I said as much on our master Pattern Trader sessions held every Friday at 11:00 AM Eastern time.
I said that this represented a good buy for no other reason than if something's not going down when it “should”, then it has to go up. And you can see that based on earnings, TSLA has catapulted higher. Now I fully expect that it will take out the $380 highs.
That’s a surprising turn of events. But this is why you have to stay objective as a pattern trader. We have to see what the market is telling us. Patterns can be busted just like we’ve seen her (the double top followed by the downtrend line). You’ll usually see warnings beforehand (the ascending lows) if you’re willing to look.
In Tesla’s case, the chart told us how it was going to break once the earnings came out. The market was once again ahead of the news.
And that’s it for this week.
To summarize: buy GBPNZD on dips and remember that NZD is the weakest of all the major currencies right now. CAD is looking like the strongest currency. I’m waiting to pounce on any USDJPY weakness and I’m still on the sidelines on silver and gold. For stocks, look for bullish opportunities including FB and TSLA.
And with that said, I wish you a healthy and prosperous trading week.
Mark “GBPNZDStairwayToHeaven” Shawzin