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Which Pairs to Trade in Today’s Low Volatility Market

Mark Shawzin
December 4, 2019

Last week was an abbreviated week to allow for the Thanksgiving holiday in the United States. We saw low volatility in the markets as a consequence.

So far, there’s nothing to worry about. But if low volatility conditions persist, this could present real challenges for your trading.

That’s because the only way to handle low volatility is to be more disciplined. Be more selective with your trades. Lower your risk size. And focus only upon those opportunities that present the very best risk-reward opportunity.

That means if a given market appears to be just pushing on a string, don’t bang your head against the wall about it. Just find another market that’s acting in a more robust fashion.

In a moment, I'll show you a few markets acting exactly like that.

But first let’s start by looking at the U.S. Dollar Index (USDI).

As you know, USDI tracks the U.S. dollar against a half dozen major currencies. Not only last week but also the last five or six weeks together, USDI has experienced low volatility market conditions with very abbreviated trading ranges. All this non-action has happened right at a major resistance area.

I define low volatility as a very compressed trading range with multiple inside bars. (An inside bar is one where the high and low are inside the week before.)

This kind of congestion represents a coiling of energy which will eventually be unleashed, often explosively. Whether that energy is released to propel USDI all time new highs or instead toward multi-year lows is yet to be seen. That’s why I’m deferring judgment to the market right now. Instead of speculating, I'll wait to see how USDI breaks out of its low volatility condition.

In the meantime, there are some U.S. dollar-correlated currency pairs which are less ambiguous.

EURUSD (the Euro versus the U.S. dollar) is still in a long-term downtrend until proven otherwise.

The interim bearish head and shoulders price pattern in the middle of this weekly chart was simply a continuation of a long-term downtrend from 1.70 to the current level at 1.10.

And since then, I don't see any pattern to suggest EURUSD is going to turn around and go the other way. There’s simply nothing to make this pair head higher.

In fact, if we look at the long-term trajectory, EURUSD is going three steps forward and two back within the cadence of its long-term channel. Until proven otherwise I expect lower highs and lower lows in EURUSD going forward.

Similarly, AUDUSD (the Australian dollar versus the U.S. dollar) shows an inherently bearish long-term downtrend too.

I don’t see any competing or contrasting pattern that suggests that we're going to see any kind of bottom in AUDUSD. In fact, the bearishness was confirmed with a double top that acted as a continuation pattern for the downtrend.

After AUDUSD cleared that pattern’s neckline and broke down, it heralded another shot to the downside and indeed that's all we've seen since.  With nothing in sight to arrest this trend, we’ll likely see new AUDUSD lows in the near future.

A currency pair I would put in a more neutral camp versus the U.S. dollar is USDJPY (the U.S. dollar versus the Japanese yen).

I’ve been observing the movements of USDJPY within the boundaries of a large descending triangle for quite some time. This pair could rally to the upper edge of the triangle before turning lower or else breaking out.

That’s because USDJPY has adhered to an uptrend channel for many weeks now. And at the moment it’s trapped at a major resistance area. Will it break higher or lower?

Ultimately, I feel USDJPY will head lower but there may be further bullish steam left before that happens. USDJPY could rise further and hit the edge of the descending triangle before the drop resumes.

That’s why I’m currently on the sidelines with this pair despite being a long-term USDJPY bear.

I had some sell stops under earlier weekly lows which were not triggered as USDJPY refused to drop … so far. Until I see something that suggests we've got a good risk-reward play going forward, I’m on the sidelines here.

But when we look at GBPUSD (the British pound versus the U.S. dollar) it has a very different look to the other pairs I’ve reviewed so far.

Where EURUSD and AUDUSD are close to trading at multi year lows and USDJPY is currently neutral, you can see the British pound has rallied smartly over the past several months. It’s trading well off its lows.

So we're going to take a look at a couple British pound-correlated pairs because there’s clearly some strength in the British pound.

GBPUSD appears to be forming an Eve and Adam double bottom (an Eve bottom is wide and rounded and an Adam bottom is narrower and more pointed). Now of course, we have some ways to go before GBPUSD is a genuine turnaround story. But in the meantime, GBPUSD is showing a lot of strength including a very recent rounding formation.

Should this pair take out recent highs above 1.30, there’s plenty of room to motor above the resistance line until it hits 1.34. It still has some work to do, though. That’s why of all the pound-correlated pairs I wouldn’t trade GBPUSD first, but it’s important to recognize the strength in GBPUSD before looking at other GBP pairs.

So here’s GBPAUD (the British pound versus the Australian dollar):

With last week's price action, GBPAUD has hit a new multi-year high. This pair is going from strength to strength now.

A couple of weeks ago GBPAUD appeared to be forming a potentially ominous topping price pattern including a bearish key reversal. That’s a bar where the market made a new high and closed on the low.

I went on record at that time and said this didn’t feel like a major double top. That’s because I was watching the bigger patterns which suggested GBPAUD was going to keep making new highs.

You see, the dominant pattern in GBPAUD is the triple bottom. And the neckline above that triple bottom has been dictating price action for quite a while now. In fact, the last time GBPAUD retested its neckline that dip served as a launch point to last week’s new highs.

I expect this pair will continue higher despite a fair amount of volatility.

This leads me to a confession about how I use stop losses versus what I recommend to subscribers.

You see, a couple weeks ago I suggested a buy stop in GBPAUD above 1.8991. I also suggested a stop loss which would have dictated you got stopped out on the latest pullback. Ouch!

Now I know this might seem difficult to appreciate, but I stay in these trades personally. My suggested stop losses are there because I feel I have an obligation to keep you out of trouble.

But for my account? If I think a pair is going higher over time I stay in. I'm not afraid of 300 or 500 pip selloffs. To me these are just normal fluctuations within a long-term bull market. So I keep my stops very wide and sometimes I don’t use stops at all. I'm very hesitant to say that because if you do the same, one day you’ll get yourself in trouble.

But I’m comfortable with the risk because I feel secure based on the long-term pattern as well as the maturity of this chart.

Does that all make sense? I’m not recommending you trade without stops. I provide you with intelligent stops that help protect you from taking large losses and/or panicking at the wrong time and taking even bigger losses.

I just don’t always apply those stops for my own trading when dominant mature patterns are dictating the long-term price action.

By “mature”, I’m referring to the fact it was some time ago that GBPAUD made its triple bottom.  For the last several years this pair traded above its triple bottom neckline and finally broke out to the upside. This suggests GBPAUD is going to track higher over time even if there are periodic downdrafts along the way.

Remember, I leave my positions on for days, weeks and even months. I don't get scared by normal market reactions and fluctuations, even if those fluctuations are sometimes as much as 500 pips at a time.

Now let’s look at GBPNZD (the British pound versus New Zealand dollar).

For many years now I’ve been an outspoken advocate of the long side of this pair. There are times when I've gone short to take advantage of pullbacks, of course. But as with GBPAUD, when I look at GBPNZD from a long-term perspective and review the long-term dominant pattern, I have to stay bullish.

The dominant pattern helps you sort out what’s real and what’s likely just a fakeout. It’s why the 300 and 500 pip swings we’ve seen in this pair are nothing but noise within a long-term uptrend that started all the way back in late 2016 and early 2017 with a double bottom.

Once GBPNZD cracked through the 1.80 neckline that bullish reversal price pattern was confirmed, especially when the neckline was successfully retested with a rounding bottom. As you can see, that neckline subsequently became new support for the next bullish pattern: a new double bottom where the current price is chopping back and forth above its own neckline.  

Long story short: GBPNZD is consolidating before the next leg up. To me, it's not a question of if but when this market is tracking higher.

In the meantime, you need to be patient. One of the ways I’ve suggested you relieve any stress over the waiting (and volatility) is by establishing a short hedge against your long position. That way you’re market neutral until you’re confident we’ve seen the last of the GBPNZD downdrafts.

Then you can lift your short hedge and be net long once again.

Now onto the precious metals, starting with XAGUSD (spot silver) on a monthly chart.

I like the monthly chart for silver because I think it offers us the best opportunity to really see what's happening.

In July and August we had what looked like a monster silver rally underway. There was a lot of hype as it happened. But this was nothing more than an emotional a knee jerk rally within a long-term bear market. The reality is that silver remains in a long-term downtrend that’s been dictated by the double top as the dominant, driving pattern.

The peaks are at very different levels where one is much lower than the other. But it’s still a double top which is a very bearish price pattern. How bearish? After silver cut through the neckline at $26 it still hasn’t come back even six years later.

The recent emotional rally got stabbed through the heart with a key reversal a few months ago. Following an enormous rise to almost $20, by the end of the month the price was back under $17. That’s very bearish. At best, silver will slide sideways for awhile. It’s more likely to trend lower, though.

That’s because it’s formed multiple inside bars since the key reversal. These are coiling bars which are building energy until it’s released … most likely to the downside.

In this chart I'm looking at XAUUSD (spot gold).

As with silver, this is a monthly chart. Gold has been much stronger than silver and so it's perhaps a little bit trickier to analyze.

However, I still expect gold will go sideways to lower over time. That’s because the driving pattern remains the double top when gold nearly broke $2,000. Gold has curled around with a rounding bottom and revisited the neckline of the double top.

That’s why I remain open to bullish scenarios in gold.

But here’s the bearish case: once gold made a new high, it’s failed to get any momentum going to the upside. In fact, just like silver, the yellow metal now has inside bars that indicate its momentum is dissipating. It’s been trading within a downward channel to.

If gold broke out of the channel to the upside in a meaningful way, that could translate into a continuing rally. I'm certainly open to that possibility. But it's looking more and more like gold will behave like silver and track sideways at best for the near future.

If you’re a die-hard gold bull, all isn’t lost. Remember that markets often need to consolidate for some time before they either rally or fall. They need to put some space between the last rally (or collapse) and the next one. Gold might not need anything more than time before we see the next rally.

But in the meantime I expect a trading range between $1,450 and $1,520.–

Now for the U.S. stock market as represented by the S&P 500.

What really drives stock prices is the real rate of return and short-term interest rates. And because interest rates have been going lower, naturally the stock market has been going higher.

It doesn’t look like that relationship is going to falter for the foreseeable future. We could see 3,300 in the S&P500.–

However, I do envisage that at some point we’ll transition to a lower volatility sideways condition. That’s because the S&P is already up 25% or more for 2019 and nothing goes up forever.

That doesn't mean I expect to see a huge sell off, of course. But I do expect to see this market stalling out as it eventually consolidates on new high ground.

And that’s it for the week, so let me summarize what I’ve discussed in this report: I’m bearish on EURUSD and AUDUSD, neutral (but long-term bearish) on USDJPY, bullish on GBP pairs (especially GBPAUD and GBPNZD), and bearish on the precious metals. I’m also cautiously bullish on the stock market.

I wish you a very healthy and prosperous trading week.

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