Unhealthy Gold, FX for the Patient, and Two Opposing Stocks
In this week's report, I'm going to cover the three markets I think are likely to move big in the next week and beyond.
Let’s start with the weekly price chart of XAUUSD (spot gold):
As you might be aware, there have been a lot of rumblings about gold over the past year: historically low inflation rates, the United States’ historic quantitative easing via the central banks, and therefore a lot of rhetoric that gold can only go much higher.
This is why I caution against looking at the news, bloggers, announcements from central bankers and so on. Instead, focus on price. Price is telling us a very different story about what gold is likely to do now and in the near future.
That’s because for the past couple months, gold has been trading within an ascending broadening price pattern. Gold caught a bid at the lower support line of the pattern earlier this year, but now prices are hurtling toward the lower end once again at the $1,725 level.
In fact, XAUUSD seems to have peaked after hitting resistance at $1,850. There’s a double top price pattern at that level, and just last week gold cracked below the neckline.
Gold is likely to hit the lower support line once again.
Then it's going to be a contest as to whether it holds and pivots higher … or instead drops even more. An ascending broadening formation is inherently a bearish price pattern, by the way. Prices often fall once the lower boundary of the pattern is breached.
In fact, they often fall all the way back to the beginning of the pattern, which in this case is around $1,100 or $1,200.
But let's take it one step at a time.
After the recent collapse at $1,850, XAUUSD has had three weekly declines in a row. It's very likely the path of least resistance is lower, and the lower edge of the support pattern is in gold’s very near future.
After that, we’ll see if gold can find some support or if the bottom of the ascending broadening formation beckons.
Now for a currency pair I really like …
In this chart, I'm looking at GBPJPY (the British Pound versus the Japanese yen):
GBPJPY hit a huge resistance level around 156. Then it was a question as to whether this was a resistance level that was going to translate into a much larger move lower, or instead a pause that refreshes.
By now I feel we can put this in the latter category: GBPJPY has merely paused during its huge uptrend.
There’s a clear Eve and Adam double bottom here. (An Eve bottom is when you have multiple attempts at one low. An Adam bottom is where you have a single attempt at a low.)
That’s a very large pattern and GBPJPY had to climb significantly just to reach (and break) the neckline.
But once price thrusts above the neckline, there’s often a retest of the neckline soon after. GBPJPY is doing that right now. If it makes a new high around 156 following the retest, then the bottom is confirmed.
Besides that potential new high, I'm also looking at the recent key reversal price action. At several points, the market made a new low to hit the neckline before closing on the high. These reversals tend to point in the direction the market wants to go when they’re backed by the bigger trend and pattern.
So the combination of patterns and price action strongly suggest GBPJPY is preparing to move higher.
But don’t jump in too aggressively just yet though. The market is often like a magician who comes on stage, hides his intentions, and doesn't just pull a rabbit out of the hat right away. He wants to distract you and tease you before he pulls out that rabbit.
I feel the giant back and forth movement right now is exactly that – a distraction. It could go on for quite some time before it moves up decisively as indicated by the underlying double bottom and the key reversals.
But patient traders should be rewarded here.
Note that GBPJPY has very wide swings. Iin an individual week, it can move 300-400 pips, so if you're attempting to take a position for the long term, don’t use a 20 pip stop. This market will take you out.
Take smaller positions with wide stop losses and let GBPJPY trade within a wide band before it gets going to the upside. I think now is a good time to put a toe in the water and get some initial long positions here.
Now for the stock market …
For the past couple of weeks or even months, the US stock indexes have been traversing higher before getting stuck in a very wide trading range.
This implies that this is very much a stock picker’s environment -- some stocks are destined to go higher whilst others are going lower.
One of the stocks I think is going higher and perhaps much higher is NFLX (Netflix):
NFLX’s overall trend has been higher, and then the stock broke out of a series of patterns to the upside.
There was an ascending triangle first -- prices broke out, retested the triangle and then went much higher.
Then there was a wide channel/trading band which lasted for about a year as NFLX traded between $460 and $575.
Finally there was a breakout above the high side of this trading range to $618. Then a retracement dragged NFLX back to $565 and ended with a bullish key reversal.
Because of that reversal and the overall trend, I think NFLX is going higher again soon. First it has to crack the immediate resistance level around $618.
But once it surpasses that, we’ll likely see a large move to the upside here.
At the beginning of this report, I said I was going to talk about three very promising trading instruments.
However, I'm throwing in an extra analysis as a bonus. I feel compelled to share what I'm seeing in the the last couple of weeks of price action in BYND (Beyond Meat).
I’ve been saying there’s a brewing enormous opportunity here for quite some time. But in the last couple of weeks, the trading action here has created even more of a trading opportunity.
In this chart, note there are multiple very bearish price patterns overhanging the stock:
There’s a head and shoulders, another double top, and ultimately another head and shoulders price pattern in BYND.
The entire double top/head and shoulders pattern is connected by a neckline at $113.
A couple of weeks ago, BYND dropped under this neckline. Then a short covering rally took it from $104 to about $114.
However, I think this is nothing more than a dead cat bounce within what looks like a very bearish price pattern and price action.
There was also a bearish key reversal last week: BYND made a new high but by the end of the week, it closed on the low. This is a small bar, it's subtle. But by closing on the low, it indicated the sellers were in control.
That’s why I think there’s nowhere to go but lower and perhaps much lower in BYND. Frankly, I'm looking for this stock to get cut in half.
Sometimes we can measure a potential move by measuring from the neckline to the top of the trading pattern (the double top in this case). The pattern ranges from $113 to about $210, which is roughly $100. If we take just 60% of that off this neckline, that means shaving $60 off to bring BYND back to a $60 - $70 level.
That’s BYND’s most likely future, in my opinion. Definitely consider shorting BYND if you haven’t already.
And that’s it for the week!
To summarize, I’m bearish on XAUUSD (spot gold), patiently bullish on GBPJPY, and bullish on NFLX. I’m very bearish on BYND.
I wish you a very healthy and prosperous trading week.
Mark "StockPicker'sMarket" Shawzin