Which Positions to Build During the Dog Days of August
Past experience has made me extremely wary of trading trend continuation moves in August.
That’s because due to the holidays, liquidity dries up and we tend to get very range-bound trading activity. Prices chop and flop around and basically do nothing but slide sideways until the autumn.
August is definitely a month for “lower expectations” when it comes to trading as I look for the big moves based on patterns. The ones lasting several weeks or months, not just for a day or two.
That’s why last week's narrow-range bar in the U.S. Dollar Index (USDI) doesn’t interest me the way it usually would. This particular narrow-range doesn’t feel like a “coil” that will unleash further market energy. Instead, it looks like the onset of the typically tight ranges we’ll probably see in the FX markets for the next four, possibly even eight weeks.
(Outside of the summer months, I love narrow range bars for their energy release potential, of course. They’re one of my favorite setups. But this one doesn’t seem to have the right “pedigree” due to seasonality.)
Now here’s the good news: there are still a number of non-dollar correlated FX pairs that have formed long-term market “topping” price patterns.
They appear poised to go over a cliff, and that should offer some great opportunities in spite of August’s dog days.
While the U.S. dollar (USD) is somewhat neutral against most currencies, the Japanese Yen (JPY), Swiss franc (CHF), and Canadian dollar (CAD) are strengthening.
Meanwhile British pound (GBP), Australian dollar (AUD), and New Zealand dollar (NZD) are mostly weakening against most other major currencies.
Accordingly, I expect sharp declines in the following pairs over time: AUDCAD, AUDCHF, CADCHF, GBPCHF, GBPCAD, GBPJPY, NZDCAD and NZDJPY.
I’ll show you several of those long-term charts in just a moment.
But first GBPUSD (the pound against the dollar) to set the stage …
This pair continues to be very weak and is now right at a key support level. The GBPUSD downtrend has been interrupted only by bearish continuation patterns that simply pause the descent temporarily before the next leg down.
That includes the double top at the beginning of 2018 and the more recent head and shoulders this year.
The bearish weight of the downtrend and these patterns is why I don’t expect the current level of support to last for very long. At most, we’ll see a shortable bounce before the next drop.
GBPCHF (the pound against the franc) is another pair that’s about to break lower into new territory
Every sign is bearish as part of the overall downtrend. There’s only one last vestige of support that could contain the market, for now. But I’m not expecting it to hold long, as with GBPUSD. This is another one to short on any rallies in the near term.
The same can be said for GBPCAD (the pound against the Canadian dollar).
It’s yet another further confirmation that GBP is very weak across the board and about to break to new lows.
I’m including this chart because of the interesting large head and shoulders pattern where the right hand should is itself a mini head and shoulders.
Everything looks bearish here too.
GBP is weak even against AUD, which itself isn’t showing much strength. GBPAUD (the pound against the Australian dollar) looks to break lower even though we’re not on the verge of historic lows here.
The reverse symmetrical triangle is likely to be a continuation pattern of the earlier downtrend, especially with the recent double top arresting the last rally.
Last week was a very bearish week in GBPAUD. So bearish that I’m inclined to think we’ll see a rally before this pair drops further. Consider shorting any such bounce and holding until we see the bottom of the triangle.
Now for non-GBP pairs, starting with AUDCAD (the Aussie dollar against its Canadian counterpart).
The initial bearish set up on this long-term chart included a double top and descending triangle. Then AUDCAD broke below all significant monthly lows. It’s now into uncharted territory with a long drop below.
I think we’ll see an enormous downtrend going forward in this pair.
Even with seasonality AUDCAD is worth hopping aboard if you take your time and show some patience. Build a position slowly over time on any bounce and hang on.
Another short candidate heading into uncharted territory is AUDJPY (the Australian dollar against the Japanese yen).
The same advice as for AUDCAD applies to this pair too: go short on any rallies, be patient, and hang on.
Now onto the precious metals …
Following a break-out above a six-year resistance level, spot gold (XAUUSD) soared over $1,500. While it’s entirely possible we could incur a bumpy ride at current levels, this pair appears head inexorably higher.
I would be looking to buy any kind of pullback in XAUUSD right now in expectation of significantly higher prices in the future.
We continue to hold well above the old symmetrical triangle that was finally broken a couple of months ago.
A daily chart of XAUSUD gives us even more reason to be long gold.
On this daily chart we see a double bottom followed by a descending triangle continuation pattern. Both are bullish.
The same goes for the most recent symmetrical triangle which acted as yet another continuation pattern.
Gold has stalled out for now but this is an instance where the inside bars appear to represent a genuine coiling of energy. Be ready to buy any upside breakout. Also buy any dip back to the triangle.
I’m also getting more bullish on silver (XAGUSD) right now. In fact, perhaps silver’s the more interesting metal to watch at this time.
Following many years in a deep slumber, this metal appears to be waking up. Penetration above last week’s high of $17.20 could be a catalyst for a broad move higher.
After all, the bearish descending triangle has been busted. I expect further resistance at $17.50, $18 and change, and finally $20. Once $20 is broken we’ll see much higher prices.
But for now let’s be a bit more modest with a silver trade. Consider placing a buy stop at $17.22 with a stop loss at $16.70 and a profit target at $18.75.
Stocks are also looking bullish in the near team.
U.S. stock indices recently soared to all-time highs. Two weeks ago the Dow Jones Industrials index (DJ30) plunged 2,000 points, following several narrow range bars.
Those narrow range bars showed that the recent rally had stalled out and the energy was explosively released to the downside.
But not for long. Last week the Dow staged a 1,000 point rally and impressive comeback. Following last week’s large key reversal bar, it appears momentum in the (US) stock market has shifted to the upside once again.
I’m not sure how long it will last, but we’ll likely see new highs before the next correction.
And that wraps up this week's Report. I’ve tried to give you a global overview of the pending opportunities in a number of markets and how to use market action to anticipate, and capitalize, on important moves.
I expect relative strength in gold, silver, CAD, CHF, and JPY, and weakness in GBP, AUD and NZD.
I wish you a very healthy and prosperous trading week.
I wish you a very healthy and prosperous trading week.
Mark “FXPrecipice” Shawzin