What To Trade (or Not) In the Dog Days of August
Well everyone, August has settled in and the dog days of summer are here.
I'm currently still on the road, and thanks to the quietness of the markets, it's a great time to be on holiday.
There's not a whole lot to talk about as the potential for big moves seems low for the immediate future. After all, that's what we live for here at the Pattern Trade: large actionable moves that make us hundreds of pips in a matter of weeks or even days.
But with everyone on holiday, low trading volumes, and lazy, go-nowhere markets …
… those kinds of moves are a good few weeks away.
I still have some trades worth watching and even taking though.
So let's take a look at the market and what's hot (and not) …
The US dollar accelerated upward last week, powered by a hawkish (and expected) Fed monetary policy announcement. Central bank officials upgraded their assessment of overall growth, employment and inflation to signal that two more rate hikes are probably on the docket before year-end.
The U.S. Dollar Index looks like this:
We have what appears to be an inverted head and shoulders forming. That's bullish, especially when you consider the price is currently trading at or near recent the neckline of that pattern.
A few months earlier I reversed my earlier bearish stance on the dollar and went bullish when I saw first one and then a second bullish H-bottom form in this market. That proved to be a good call and we had a profitable spring based on bullish USD trades.
I see no reason to reverse that stance yet, especially when there's a chance the trade war continues to heat up. Ongoing trade war tensions between Washington and Beijing may offer a catalyst for higher USD prices as a safe haven.
Risk avoidance strategies would kick in and this would definitely give the dollar a boost.
We would expect to see similar patterns in reverse in both EURUSD and GBPUSD (the Euro and the British pound against the dollar).
Here's EURUSD first.
The Euro comprises about 60% of the US Dollar Index. Therefore it's not surprising to see the opposite of inverted head and shoulders as in USDI: a bearish head and shoulders.
We're also sitting at the neckline for this pattern too.
That strongly suggests that EURUSD prices should eventually head lower. Just probably not in August. However, there's an opportunity to short any rallies that might pop up and sit on those trades for gains later in the year.
With GBPUSD, we see the same bearishness with a head and shoulders. One with a double top as the head.
If this was November, I'd be loading up on short positions to take a shot at this, but not right now.
As with EURUSD, I see GBPUSD likely to return to its old lows sometime later this year.
Just not yet.
It's frustrating, I know. Because ordinarily when I see mature bear price formations as in these two pairs, I feel compelled to take a swing at these trades. However, years of disappointing trading experiences in August has reinforced my notion to avoid these obvious set-ups.
Why endure the frustration of trading when good setups simply don't follow-through?
So while those EURUSD and GBPUSD trades could work out as anticipated, I'm now willing to let “good” trades slip by at this time of year. That's because failed breakouts give us nothing but losses.
So what else is worth a look?
Consider shorting USDJPY (the dollar against the Japanese yen).
The old, long-term head and shoulders from 2015-2016 should dictate where this pair will head next, which is down.
Despite that, we still saw a breakout from the more recent (and also bearish) descending triangle. I think that's a false breakout as the price has already dropped back inside the trendline.
The long term direction is ultimately down. Although having said that, prices will likely track inside the triangle for awhile and then ultimately break lower.
I think it's worth shorting USDJPY with your stop loss above the recent rally at the 114 level.
Another short worth taking now: NZDUSD (the New Zealand dollar against its American counterpart).
This really is one pair you could trade right now (despite the August dog days) as it presents a terrific risk-reward opportunity.
We're seeing a double top and the price has already closed below the neckline of that pattern. Plus there are key central bank statements coming out soon which are likely to drive NZD even lower.
I believe there's no further upward momentum left here and NZDUSD is worth shorting at or near current levels. A good conservative entry point is to use a sell stop below current levels.
I expect this pair to plumb the lows we earlier saw way back in 2016, sooner or later.
Another long time favorite of mine is spot gold (XAUUSD).
We recently saw a breakdown from support within the ascending broadening formation at the 1280 level. This was very profitable for us as we went short and took 520 pips profit.
However, I'm now standing aside as we likely won't see much follow-through in the next couple of weeks. I feel XAUUSD is currently sitting at strong support in the $1220 area and there's currently not a good risk-reward ratio.
What we're waiting for is a meaningful snapback — a rally which puts some energy back in the market. Right now spot gold is “exhausted” after a significant drop. I want to see some energy coiled up in this market again before shorting once more.
I'm long-term bearish on gold and expect that ultimately, we'll see the yellow metal heading to $1,000 an ounce.
So what's happening in the stock market?
The NASDAQ100 (the proxy index for U.S. tech stocks) had a strong selloff and then it closed in the direction of the main trend.
So we're still seeing the big, bad bull market roaring on. In light of that, I've been successfully handicapping the outcome of stock prices following earnings reports.
For example, I made $185,000 betting on the earnings outcome of MELI a couple of months ago.
Between forex and the stock market, that means “any time” is a good time to profit.
Because not only could you go short USDJPY and NZDUSD right now, there are lots of earnings reports to handicap too.
Just as I've shown you today, the exact same profitable patterns show up in FX as well as in the stock market.
The key point is that once you learn the ideas and concepts, they're with you forever.
So if you're interested, just check out that link.