What Do the Kiwi Dollar, Gold and Facebook Have in Common?
You probably won’t be too surprised to learn that the markets completed yet another week with unremarkable results. The US dollar saw another week of seesaw price action within the same choppy range that’s contained its price action since the beginning of the year.
The U.S. Dollar Index (USDI) …
The only point of note is that the tightly coiled symmetrical triangle is winding ever tighter.
And thanks to the long-term uptrend in USDI, I continue to favor the upside when this triangle is ultimately broken. So even though dollar correlated pairs are tightly constricted, the dollar should be the dominant bullish currency for the foreseeable future.
The tightly constricted range is most definitely not an environment for good trading.
So here’s what I’m doing: I’m managing the declining volatility and tight trading range FX market environment by …
- trading more selectively
- being prepared to hold positions for a longer period of time, and
- widening my stop-loss levels, which of course requires reducing trade lot size positions commensurately to ensure your risk remains the same.
Think of your risk as a short, non-stretching rope looped behind your neck where you hold an end of the rope in each hand.
Label one hand “Position Size” and the other hand “Stop Loss Width.”
Now extend one arm (“Stop Loss Width”) to lengthen the rope on one side of your neck. Since the rope doesn’t stretch, your other arm (Position Size”) must bend and therefore shorten the rope on that side.
The length of the rope (i.e. your total risk) doesn’t change, just the relative lengths on each side of your neck. So a wider stop loss means a smaller position size, and vice versa.
Does that make sense?
There’s never a good excuse to increase your risk in a trade. Whenever I need to widen my stops due to volatility or uncertain markets, I always cut my position size proportionately.
I strongly recommend you do the same.
Now let’s take a look at GBPUSD (the British pound against the dollar) for another good example of declining volatility and the need for more selective trading.
It’s obvious that GBPUSD is very tightly constricted. It’s not going anywhere at the moment.
However, I think this pair is vulnerable to going lower over time due to the double top this year and the overall downtrend we’ve seen since 2015.
Another hint the bears are likely to prevail in the breakout is that we’re currently seeing lower highs in the current range. The lows are failing to get higher, and all the compression is bearing down from above.
We see additional bearishness in GBPAUD too (the pound against the Australian dollar).
The new high made several weeks ago has been followed by increasingly lower highs to form a bearish channel as I’ve illustrated below:
The last high also completed a triple top as part of a reverse symmetrical triangle – both are bearish patterns. (The symmetrical triangle is bearish as I expect it to act as a continuation pattern to the triple top.)
That’s why it looks like we’re on the precipice of rolling over to the lower edge of the triangle.
I’m not short yet though. I’m staying on the sidelines to see what kind of break we get, because in this current trading environment it’s quite likely that any near-term breakout is going to rebound before descending once again. There’s plenty of time to wait with this one.
I think we’ll see quicker results with both NZDUSD (the New Zealand dollar against its U.S. counterpart) and XAUUSD (spot gold). I’m short both.
Let’s start with NZDUSD.
This pair has dropped from a high of 0.88 in 2015 to 0.67 today. It’s a long-term downtrend that shows no sign of reversing yet.
The multiple topping patterns we’ve seen since 2017 will be very difficult to break to establish any bullish trend. And while an ascending triangle has formed – normally bullish – the price has already dropped through the trendline of that triangle.
It’s temporarily snapped back inside this past week due to the low-volatility environment we’re seeing in the markets right now, but NZDUSD is surely poised to drop lower sooner rather than later.
Meanwhile, XAUUSD prices are poised to re-enter the long-term symmetrical triangle price pattern that’s formed on the monthly chart.
After a tantalizing breakout a few months ago, the price now looks to be telling us that breakout was nothing more than a bull trap. This doesn’t bode well for the long side.
There’s even more support for this stand on the weekly chart. Last week XAUUSD suffered a nasty key reversal following a mini double top. I believe this will ultimately set this pair on a lower trajectory.
I feel XAUUSD should violate the 1280 support zone soon and I’m short from 1311 and also 1285.
I’m ready to take an additional short position in spot gold at 1297 if the opportunity offers itself.
The U.S. stock market looks likely to head in the other direction as key indexes continue a march toward their respective all-time high peak trading levels. I’m using the NASDAQ 100 index for this example.
This index is poised to hit new highs, although this doesn’t mean a significant bull run is imminent. In fact, the price could very well slide sideways for some time, just like when it hit new highs late last year prior to the October-December panic.
But that doesn’t mean individual stocks are all locked in step with it.
I particularly favor the price pattern we’re seeing in Facebook (FB). The bullish double bottom price pattern established a few months ago sets the foundation for ever increasing progress to the upside in this stock.
Besides the double bottom, there’s also a reverse symmetrical triangle. (The triangle is bullish here because it’s acting as a continuation pattern of the bullish double bottom.)
I’m expecting FB will reach at least 200 if not all-time new highs by the time its bull run is over. There could be some possible resistance at 190 but take any pullback as a buying opportunity here. I think FB has nowhere to go but up over the long term due to the strength of the double bottom and subsequent price action.
If you’re not long FB already, consider entering at 179.25 and holding on until 200.
Stay patient with this on and you should be rewarded handsomely.
Be aware that next week’s trading will be shortened by the Good Friday holiday and overall participation across all markets is likely to diminish as the Easter weekend draws closer. Lighter volume means that volatility will likely be low except short intervals when sudden (and completely unpredictable) kneejerk movements occur completely out of the blue.
Be cautious with your trading size and stops!
Mark “XAUUSDTrajectory” Shawzin